Investors await rupiah stability

Investors await rupiah stability

NEW YORK (Reuter): Indonesia's free-floating rupiah should rebound on the strength of economic fundamentals in coming weeks, but volatility will deter foreign investors until then, U.S. experts said.

"We may enter in when we feel the likelihood of a stable exchange rate will increase," said Luis Luis, emerging market debt analyst at Scudder Stevens & Clark. "That will depend on getting more stability in Malaysia and Thailand."

The rupiah declined more than 5 percent versus the dollar after the central bank removed its intervention band, abandoning the parameters under which the bank steps into the foreign exchange market.

The Indonesian unit fell from 2,637 per dollar to 2,815 before reversing modestly to trade at 2,770/2.800 at 1500 GMT. While the rupiah remains supported by solid economic fundamentals, which compare favorably to other countries in the region, it appears susceptible to erosion in neighboring currencies such as the beleaguered Thai baht, Luis said.

"We still have to look at Thailand as the critical question," he said.

Longer term rupiah stabilization will most likely arrive via equity investment, a more-liquid market in the country, Luis said. "As equity investors return to pick up bargains, we'll see the currency improve," he said.

U.S. investors and analysts generally agreed the Indonesian central bank acted wisely in floating the currency.

Solid economic fundamentals should protect against protracted rupiah weakness, and the economy should weather the inevitable interest rate hikes and slowed growth, said Thomas Trebat, head of emerging markets research at Citicorp Securities.

"It's a good move that allows them to protect their foreign exchange reserves," Trebat said, adding that "it's going to require the same types of painful adjustment that have been followed to some degree in Malaysia, Thailand and the Philippines."

The rupiah will likely further its losses in the days ahead, and equity or debt investors will find more attractive levels for re-entry into Indonesia, he said.

Ashok Chabria, a senior foreign exchange trader at Australia and New Zealand Banking Group, said Bank Indonesia's float caught forex players by surprise.

"The day before, they were defending (the rupiah). They had also raised rates," Chabria said. "I think they realized that within the Asian currencies, there's nothing you can do -- it's just wasting money defending the currency."

Dollar/rupiah slipped from its highs in mid-morning trading as dealers bought rupiah and sold Singapore dollars, Chabria said. Singapore's currency had held its value better than the other southeast Asian units since the Thai crisis began, he said.

"They're looking at crosses and saying ... the move in the (rupiah) has already happened," Chabria said.

But rupiah has most likely stabilized only for the near term, since the float apparently caught Indonesian corporates with short dollar positions, he said. "Any dips, you'll see dollar buying."