Rupiah expected to weaken next year: Merril Lynch

The Jakarta Post, Jakarta

U.S.-based investment firm Merrill Lynch predicted the rupiah could still appreciate slightly toward the end of this year, but warned the local unit would reverse course next year.

"Although we expect a moderate rise through the end of the year, the rupiah's strong run is largely completed, in our view," it said in a report.

"In fact, we believe the currency will reverse course in 2003, once the current pipeline of reform-driven capital inflows has been received," it said.

Merrill Lynch's end-2003 exchange rate target is Rp 9,000 to the US dollar, but "sentiment could turn sour if the growth outlook or the reform process falters, creating downside risks to our forecast".

The government is targeting an average exchange rate of Rp 8,700 per dollar in its 2003 state budget draft.

After hovering at about Rp 10,500 per dollar at the end of last year, the local unit has been steadily rising since early this year. Analysts attribute the rise to a series of positive news, a more stable political situation and stronger macroeconomic indicators, resulting from the progress the government has made on its reform program and capital inflow from the sale of assets held by the Indonesian Bank Restructuring Agency (IBRA).

Merrill Lynch said in its report the local currency was still expected to slightly strengthen in the near term within a narrow range -- from Rp 8,450 to Rp 8,500 per dollar.

This would be in line with the government's 2002 average exchange rate target of Rp 9,000.

The rupiah ended weaker in thin trading on Friday at Rp 8,885 per dollar, as it tracked the Japanese yen lower against the dollar amid a lack of fresh local leads.

The firm said the main drivers of the rupiah until the end of this year would include capital inflow resulting from the sale of IBRA assets, an improving macroeconomic picture, stronger export revenue and declining emerging market risk aversion.

IBRA just concluded a massive sale of nonperforming loan assets, raising about Rp 23.1 trillion or about US$2.6 billion. Payments from the sale are expected to begun being made starting next month. But the agency, which is expected to end its role at the end of next year, has already sold most of its best assets, limiting its ability to attract more capital inflow next year.

A stronger and more stable rupiah is seen as key for the country's economic recovery.

"The major trend in Indonesian financial markets this year has been the favorable macro dynamic sparked by the appreciating currency," Merrill Lynch said.

The appreciating rupiah paved the way for a decline in inflation and nominal interest rates, both of which helped strengthen consumer confidence and spending, a key driver of economic growth so far.

Merrill Lynch forecast end-December inflation to fall to 7 percent to 8 percent, compared to 10 percent year-on-year in July.