Rupiah gains unlikely to herald turnaround: Analysts

Rupiah gains unlikely to herald turnaround: Analysts

SINGAPORE (Dow Jones): While the rupiah surged almost 4 percent this week as the meeting of Indonesia's highest elected body unexpectedly turns out to be in the embattled president's favor, analysts say this doesn't herald a meaningful turnaround for the beleaguered currency.

Although President Abdurrahman "Gus Dur" Wahid looks set to survive the annual meeting of the People's Consultative Assembly, also known as MPR, several political uncertainties linger. The MPR meeting will end Friday.

Gus Dur's move to relinquish the daily running of Indonesia's enfeebled government to Vice President Megawati Sukarnoputri has somewhat alleviated the short-term political risk, analysts say. Nonetheless, reservations about her governing abilities could cast a pall on the rupiah, they add.

"Indonesia's problems remain awesome, and Megawati lacks the skill to make such a political dispensation work," says Simon Flint, an analyst at Bank of America.

While the rupiah could strengthen further to Rp 8,200 to the dollar in the short term, and even temporarily rise toward Rp 7,800 to Rp 7,900 should it breach that level, it is poised to resume its recent weakness following the MPR meeting, analysts say.

Analysts say the dollar could rebound back to as high as Rp 9,000 in coming months, but many who have toned down their bearish views in recent weeks now doubt the U.S. currency will be able to stay above Rp 9,000.

The dollar has lost almost 4 percent this week and trades at Rp 8,300 midday Friday, its lowest level in more than two months. The dollar is down about 13 percent from its peak of almost Rp 9,600 in mid-July.

The rupiah, however, is still about 18 percent weaker than the level it was trading at the start of the year, making it the worst performing Southeast Asian currency.

The recent reversal in the rupiah's fortunes hasn't changed analysts' bearish views on the currency. "It does represent some hope, but until I see evidence the political mess gets cleared up, only then will I reverse my call toward a stronger rupiah," says Sani Hami, an analyst at market consultants Standard & Poor's MMS International. "At the moment, I'm still looking for the rupiah to weaken after the MPR."

Other efforts to unseat Wahid could continue in the smaller House of Representatives, or DPR, through legal investigations into alleged scandals, which could eventually result in impeachment moves, some analysts say.

For months, rupiah watchers had been nervously expecting a showdown between Wahid and his opponents at the annual meeting of the MPR.

But Gus Dur's conciliatory stance during the session this week appears to have mollified some of his critics, if not head off threats by some of his opponents to impeach him for incompetence, at least for the time being.

Instead of reeling to fresh post-crisis lows, as some bearish currency watchers had predicted earlier this year, the rupiah has staged one of its best performances in recent weeks after the wily president announced late Wednesday that he would delegate management of day-to-day operations to Megawati.

But analysts say the euphoria is unlikely to last.

"The deal with Megawati has substantially reduced the risk of impeachment or overthrowing of the president," says Flint at Bank of America.

"However, the realization of Megawati's new role will probably be negative in the medium term," says Flint. "We are more confident now that our year-end target of Rp 8,500 to Rp 8,800 will be attained."

Megawati's limited governing skill is a source of concern: "Her record in addressing the problems in Maluku has been evidently dreadful," says Flint.

Violence in the Maluku intensified early this year, despite a trip by Megawati to the province.

The harsh political realities will also sink in after Wahid reshuffles his cabinet at the end of this month.

The government will continue to face "many challenges" after the MPR session, says Steve Brice, a currency strategist at Standard Chartered Bank.

"These include asset sales targets that have to be met and other unpopular fiscal measures that may have to be implemented," Brice says. "The latter includes a fuel price increase that is expected in October, which has the potential to feed through to social unrest."

Brice says he expects the rupiah to slide to Rp 8,900 to the dollar in three months, and Rp 8,400 in six months.