Morgan Stanley sees rupiah's value at 6,000 by year-end

JAKARTA (JP): Indonesia's newly established legitimate government will boost the rupiah's value against the U.S. dollar toward 6,000 by year-end, according to an estimate by the United States-based investment bank Morgan Stanley Dean Witter (MWD).

"We see scope for the dollar-rupiah to trade toward Rp 6,000 by year-end," the investment bank said in its report.

It said that the currently undervalued rupiah offered ample room for further appreciation against the dollar.

In its latest "Indonesian Rupiah" report made available on Thursday to The Jakarta Post MWD said that at the current level of 6,800 to the U.S. dollar, the rupiah was still grossly undervalued.

"The rupiah is 25 percent undervalued. This implies that the dollar-rupiah could in principle fall to the 5,000 to 5,500 range," MWD said.

The report implied that the current rupiah value continued, to some extent, to be dictated by decisions made during the previous administration under former president B.J. Habibie, who often had awkward relations with the international aid institutions.

After two years of economic and political uncertainty, the People's Consultative Assembly (MPR) democratically elected last week the country's President and Vice President for the first time in its history.

"The significance of a legitimate government in Indonesia should not be underestimated," the report said.

The report added that the composition of the Cabinet formed this week by newly elected president Abdurrahman Wahid had made an important step in further establishing his government's legitimacy.

"(The Cabinet) is free of blatant ethnic, political and religious biases or alliances," the report said.

The report stated that the positive political developments of the last nine days played a tremendous part in reducing the political risk status of the country.

"Essentially, the biggest noneconomic risks are now behind us. From this point forward, the dollar-rupiah will be determined more by economic fundamentals than the noneconomic factors."

The report also acknowledged the substantial problems Indonesia was facing, such as solving the external debt overhang, completing the domestic bank restructuring program and creating a conducive environment to attract foreign direct investment.

"However, with the new government in place, the international creditors would be more inclined to consider debt rescheduling and write-offs," the report said.

The rupiah closed lower at 6,925 against the greenback on Thursday, compared to 6,910 the previous day.

Dealers said that the trading volume was meager due to the lack of fresh leads on the new government's economic direction.

"We are closely monitoring what programs the newly formed Cabinet will implement, and also hoping for the prompt release of the full report on the Bank Bali case by the House of Representatives to the public," one dealer said.

The Jakarta Stock Exchange Composite Index ended higher by 1.4 points, or a quarter percent, to 577.93, with the volume of 255 million shares valued at Rp 411 billion.

Dealers said a late buying spree on select blue chips prevented the index from closing lower on Thursday.

They said investors were cautious during the day over whether the new Cabinet would prove capable to cope with the country's crisis-hit economy. (udi)