New LoI not expected to boost rupiah

JAKARTA (JP): Emerging from the positive sentiment over the new government and its good start with the International Monetary Fund (IMF), the rupiah's waning strength would unlikely find reprieve in Monday's expected completion of a new Letter of Intent (LoI) with the Fund, analysts said.

Economist Dradjad H. Wibowo of the Institute for Development of Economics and Finance (Indef) said the market had largely factored in the completion of the IMF's LoI.

"Don't expect the rupiah to appreciate much from the new LoI," he told The Jakarta Post over the weekend.

He said the rupiah's surge upon the completion of a new LoI, would largely be driven by short term expectation.

A visiting IMF team arrived in Jakarta last Sunday to draw up a lending agreement with the government, better known as the LoI.

Should the IMF agree to the new LoI, it would unlock its long withheld US$400 million loan tranche for Indonesia.

Led by the Fund's Asia Pacific Deputy Director Anoop Singh, the team is slated to leave Jakarta today.

Though it refrained from stating Monday as a target, the team's constant remarks that talks were "on track", signaled the IMF was ready to resume its lending program for Indonesia.

On Friday, the Fund met with local representatives of donor countries under the Consultative Group on Indonesia (CGI), assuring them the country had made good headway with its reforms.

State Minister for National Development Planning, Kwik Kian Gie said the IMF's comments helped bolster donor countries' confidence in Indonesia's economy.

That in turn would enable the government to gain support from CGI to help cover the 2002 state budget deficit. The CGI will convene in November for future loan discussion.

Despite the inflow of positive remarks from the IMF, the rupiah has been trading flat.

Last Monday, the local unit started off high over news of the IMF's arrival, and the upbeat mood on the government.

Later in the week, investors shrugged off positive news from talks with the IMF, allowing corporate dollar demand to offset the rupiah's earlier gains.

On Friday, the local unit closed at 8,730 against the greenback down from 8,550 on Monday, or flat from last Friday's closing at 8,740.

Dradjad said the rupiah had yet to trade more on fundamental sentiments, shifting from the current speculative mood in the market.

"I see the rupiah already entering its fundamental zone," he said.

There, he said, the rupiah was exposed to corporate dollar hunters in need to repay foreign debts.

"Private foreign debts (maturing) in the second half of this year could reach as high as $19 billion," he warned.

According to him, companies had rolled over some 30 percent of the $10.9 billion in debts due to mature in the first half, to either the second half or next year.

As for government foreign debts, he went on, the amount could hit $6 billion, if it fails to activate a void Paris Club II debt rescheduling deal.

The Paris Club creditor nations agreed to reschedule payment of debts worth $2.8 billion, on the condition Indonesia secures the IMF's LoI.

With the club to meet in September, both the IMF and Indonesia expect to have a new LoI signed early that month at the latest.

Dradjad said for this week, the rupiah was likely to remain in its fundamental zone, that would peg the unit at between 8,300 to 8,900 to the dollar.

On the stock market, positive news from the IMF did little to uplift the market's weak buying sentiment. Trading for the week was stuck at between 435 to 441.

Trading value ranged at around Rp 400 billion, but sagged to Rp 267 billion on Friday's trading.

The Jakarta Stock Exchange (JSX) Composite Index closed Friday trading at 441.22 from 435.32 a week earlier.

Stock analyst Adrian Rusmana of PT BNI Securities said Bank Indonesia's decision to hike its interest rates could discourage investors from entering the stock market.

In last week's auction, Bank Indonesia three-month promissory notes (SBI) climbed to 17.61 percent from 17.30 percent a week before.

Consequently, banks would raise their deposit interest rates accordingly, or to around 17 percent, Adrian explained.

"Why would I want to enter the capital market, if I can make some 17 percent on the money market," he said.

Bank Indonesia executive said interest rates would remain tight, due to continued inflationary pressure.

Adrian said investors further anticipate SBI rates to flirt with the 18 percent mark in this week's auction.

The central bank gave no clear signals on when it would ease its money policy, citing only it awaited concrete improvement in the economy.

Adrian also warned of market intervention in the coming days, if the market remains thin and the index weak.

"I saw the usual intervention scheme on Friday's trading, which appears to have propped the index up shortly before the market closed," he explained.

Foreign investors with two-month old positions would likely continue to unload local shares, he said.

Back then growing optimism of Megawati Soekarnoputri becoming the country's fifth president, enticed foreign investors to join the buying spree of local shares.

"Although shares have fallen drastically since the new government took over, the rupiah's past gains partly made up for the loss in the share value," he explained.

Given the bleak outlook, Adrian expected the index to trade at between 442 to 430 for this week.(bkm)