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."