BI expects stronger rupiah

Dadan Wijaksana, The Jakarta Post, Jakarta

The rupiah, which has been on a weaker footing against the dollar lately, will get a huge boost from the sale of US$1 billion in global bonds, central bank governor Burhanuddin Abdullah said on Thursday.

The flow of payments for the dollar-dominated bonds would hike the dollar supply in the local market and thus ease pressure on the local currency, he added.

"The inflow of funds is expected within the next five days," Burhanuddin said on the sidelines of a discussion on the economy.

In its first move since the crisis, the government has tapped the international debt market by launching the sovereign bond on Wednesday night. The bond carries a 10-year maturity profile and gives investors a 6.85 percent return.

The $1 billion bond issue is more than double the initially planned $400 million. The government decided to raise the amount of bonds in view of huge demands from global investors, who had submitted offers worth $4.16 billion.

Burhanuddin did not mention as to how far the rupiah was expected to rise from the impact of the bond, but on Thursday, the positive sentiment from the sale was already apparent. The rupiah closed at 8,545 per dollar, higher than the 8,560 closing rate the day before -- the lowest in four months.

The rupiah has been under pressure recently, falling victim to the dollar's renewed strength against top currencies in the region, including the Japanese yen.

As the impacts from the bond issue would help secure the rupiah's mid-term prospect, Burhanuddin was optimistic that inflation would be lower this year than in 2003, and lower than Bank Indonesia's initial target for 2004.

In 2003, Indonesia posted the lowest year-on-year inflation in four years at 5.06 percent. Bank Indonesia has forecast inflation this year at 5 percent, lower than the government's 6.5 percent estimate in the 2004 state budget.

Aside from the rupiah's solid showing, Burhanuddin pointed at other contributing factors that would ease inflation, including a controllable amount of money in circulation and estimated successful harvests, which would strengthen the supply of goods.

A low inflation will limit damages to the people's purchasing power, which is crucial to retaining a robust domestic consumption, the country's main engine for economic growth.

It will also provide more leeway for the central bank to keep lowering its one-month benchmark interest rate, which now stands at 7.24 percent -- already an all-time low.

However, some economists cast doubts on Bank Indonesia's forecast, saying that the April general elections would negatively impact the year's performance of those monetary indicators.

Martin Panggabean, a Bank Mandiri economist, said in the bank's economic outlook report the elections would hamper the performance of rupiah and inflation.

Martin assumed that the rupiah would hover at an average of 8,800 per dollar this year, higher than the 8,600 target set out in the 2004 budget, while annual inflation would level at 6.8 percent.

The two factors would lead to a rise in Bank Indonesia's rate towards the year-ends to a range of 8.9-9.5 percent, Martin said.