Planned fuel price hike to bring down stocks, rupiah

Urip Hudiono, The Jakarta Post, Jakarta

Stocks and the rupiah are expected to drop further on the government's plan to raise domestic fuel prices early next year, analysts said on Sunday.

Both the Jakarta Composite Index and the rupiah slipped last week on profit taking by investors, who feared a possible rise in inflation from the fuel price hike would be bad for business and even possibly create political instability.

The rupiah ended trading on Friday at Rp 9,220 per dollar, from Rp 9,150 the previous day.

The Jakarta Composite Index closed at 945.23, down 18.57 points from the previous day.

Rising inflation could force the central bank to raise its benchmark interest rate, hampering lending activity and economic growth, and almost certainly denting purchasing power.

Analyst Ferry Latuhihin from Danareksa Securities predicted profit taking by investors would continue over the planned fuel price hike.

"Investors also see many share prices as still being overvalued, so there is still room for them to drop further," he said.

Ferry said the index could fall as low as 711 next year as a result of the impact of rising domestic fuel prices.

"Foreign players could dump their stocks and bonds for profit or at least to salvage their investment and go to other emerging markets," he said.

This is already happening, Ferry said, noting that several foreign banks have begun selling their rupiah bonds.

There was hope earlier this month, before the fears over rising fuel prices, that the Jakarta Composite Index would break the psychologically important 1,000 level.

Profit taking by investors, Ferry continued, will put pressure on the rupiah as investors convert their profits into dollars.

"The rupiah could therefore further slide to Rp 9,300 against the greenback," he said.

Currency analyst Farial Anwar agreed with Ferry, saying the market moves mostly on how it perceives and anticipates government policies.

"In regard to the plan to raise fuel prices, the market mostly sees it as negative, especially if the public is unable to accept the rise," he said.

Farial suggested that Bank Indonesia implement monetary policies to intervene in the market, such as using the country's foreign currency reserves to supply the local currency market with dollars.

However, any move by the central bank to defend the rupiah -- and raise interest rates to stem inflation -- could backfire on the stock market, with investors selling their stocks in banks, the analysts said.