'Hot money' won't hurt rupiah

'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."