'Hot money' won't hurt rupiah

Dadan Wijaksana, The Jakarta Post, Jakarta

The Standard Chartered Bank is painting a rosy picture of the rupiah for the next 12 months, dismissing worries that the currency is facing risks of a sharp downturn caused by an outflow of "hot money".

The bank said in its latest economic and market report that hot money -- defined as funds that are highly mobile and could abruptly be repatriated in the event of a temporary deterioration, perceived or real, in the country's economic situation -- will pose little threat to the rupiah's stability over the next 12 months.

"We believe the vulnerability of the rupiah to an outflow of capital is much lower than before the crisis, due to a lower base of hot money and higher foreign international reserves," Fauzi Ichsan, StanChart economist, said.

A number of analysts previously raised fears that the current strengthening of the rupiah would not be sustainable as hot money was part of the capital inflow, which has helped strengthen the rupiah. Once the hot money flows out, as it did in a massive way at the start of the economic crisis in 1997, the rupiah could drop.

The economic analysts speculated that there would be large outflows likely to occur around the presidential elections in 2004.

However, Fauzi disagreed, saying that currently, the ratio of cumulative hot money inflows to total reserves had drastically fallen to 37.8 percent, compared to over 150 percent at the end of 1996.

"This means the central bank should be able to comfortably manage any volatility generated by political developments. In the near term, (we) expect the surge to push the rupiah much stronger, which peaks in the fourth quarter of the year," he said.

Since early this year, the local unit has appreciated around 8 percent in relation to the dollar, thanks largely to a combination of the global weakening of the U.S. greenback and capital inflows in the form of foreign portfolio investments.

Nonetheless, hot money is part of those capital inflows, but Fauzi was optimistic it would not pose a significant threat to the rupiah.

He argued that large portions of the foreign portfolio investments were spent on the purchase of state assets under the privatization program, while the short-term hot money was invested in the country's booming bond and stock markets.

The privatization program allows the government to sell its majority ownership in a number of large companies to strategic investors who put their capital in the companies for a medium or long term.

"This (the privatization program) does not attract hot money and hence is less likely to create currency volatility if the domestic situation deteriorates," Fauzi said.

He admitted that monetary outflows would affect the stock market, but impact on the rupiah would be small.

"Heavy equity selling in the market is likely to reduce sharply the value of foreign investors' portfolios, which would in turn reduce the potential size of capital flows out of the country," he said.

Furthermore, Indonesia was currently more prepared to deal with any such outflows, due to the large amount of foreign reserves held, which could be used to mitigate the impact of the capital flight, according to Fauzi.

The country's current foreign reserves stand at around US$34 billion, compared to $24 billion at the end of 1996.

Those factors are the main reasons behind the bank's forecast that the rupiah would remain firm against the dollar.

Even if the currency weakens, Fauzi said: "Any rupiah weakening is likely to be limited to around 8,500 to the dollar in the next 12 months."