Fri, 25 Jul 2003

Rupiah hits new low as pressure continues

The Jakarta Post, Jakarta

Pressure on the rupiah continued on Thursday, sending the local unit to a new multi-month low early in the day, although late intervention by Bank Indonesia helped mitigate the losses.

The rupiah closed at Rp 8,590 per U.S. dollar, slightly stronger than the 8,610 on Wednesday. But dealers said that the local unit fell to 8,730 in early deals as foreign investors continue to unload rupiah-denominated assets.

Bank Indonesia senior deputy governor Anwar Nasution confirmed that the central bank had intervened and used its foreign exchange reserves to buy rupiah on the market.

"Bank Indonesia always stays in the market to guard the rupiah. But the intervention is not to peg the rupiah, only to reduce the volatility," he told reporters.

He did not reveal the amount of foreign reserves it spent on buying rupiah, but dealers predicted the amount of dollar injected into the market could not be too large as evidenced by the relatively thin trading volume.

The daily trading volume currently averages around US$200-$300 million.

Anwar said that the weakening of the rupiah was due to a combination of external and internal factors.

On the external front, investors have started to switch to dollar assets on renewed optimism of a rebound in the U.S. economy this semester, as forecasted by chairman of the U.S. Federal Reserve Alan Greenspan.

Indeed, other regional currencies have also lately weakened against the dollar.

Anwar said that the declining interest margin between the rupiah and dollar have further pushed some investors to switch to the American greenback, while at the same time local corporations are also purchasing the dollar to repay foreign debts.

He added that plans by the government to impose a tax on local mutual funds may have also triggered investors to cash in their gains.

The booming mutual fund industry, which invest heavily in local bonds, have been mainly driven by money from overseas.

Meanwhile, traders said that the rising political tension ahead of the Annual Session of the People's Consultative Assembly (MPR) next month was another possible reason for investors to cash in their local assets.

But Anwar said that the current decline in the rupiah was still considered "normal," and should only be temporary.

Coordinating Minister for the Economy Dorodjatun Kuntjoro- Jakti shared the view, saying: "A depreciation in a range of 1 to 2 percent is still normal in a country applying a free-floating exchange-rate system."

Some analysts have also said that the drop in the pressure on the rupiah should only be short-lived as the country's macroeconomic fundamentals remained sound and that the government was committed to continued sales of state assets.

Another reason is that there is no strong evidence yet that the U.S. economy would significantly rebound in the near future.

Meanwhile, Minister of Finance Boediono said that the government would continue to work hard to maintain the country's macroeconomic fundamentals by controlling inflation and cutting down the budget deficit as one strategy to stabilize the rupiah.

The rupiah has been rapidly rising against the dollar during the first six months of this year, making it one of the best performing currencies in the region. This has greatly contributed to current positive developments in two macroeconomic indicators, low inflation and interest rates.

But in the past two weeks, the rupiah has started to weaken.

Meanwhile, the rupiah's slide caused another panic sell-off at the stock market, with the Jakarta Composite Index closing 1.5 percent lower on Thursday.

The index ended at 505.04 points, from 512.62 points the day before. The drop in the value of the rupiah will create a heavier burden on companies saddled with huge foreign debts.

Decliners led gainers 102 to 26, with 67 stocks unchanged.

Volume was 1.11 billion shares valued at Rp 667 billion.

"There was a bit of panic selling as fears that the rupiah may fall further escalated," a trader with a foreign brokerage firm was quoted by Dow Jones as saying.