Rupiah may break 11,000 level this week

JAKARTA (JP): The gloomy outlook for the country's economic fundamentals and a standoff between President Abdurrahman Wahid and his political opponents are likely to drag the Indonesian currency down further, analysts have warned.

The analysts said over the weekend that the rupiah might break the important 11,000 barrier this week due to worries over the worsening of the country's economic fundamentals and the continued impasse between the President and his political foes.

They said that the rupiah had been trading dangerously close to 11,000 last week, and that breaking the level would come easily.

Currency observer Khalil Rowter from Danareksa Securities said market sentiments were low, amid a steady flow of negative news on the economic and political front.

"The market is not expecting any good news next week that might help the rupiah," Khalil said on Saturday.

He said the market was concerned about the government's comments that it may not be able to keep this year's deficit in the state budget below the projected level.

"In the short term, the state budget deficit would remain the market's primary reason for depreciating the rupiah," he said.

Coordinating Minister for the Economy Rizal Ramli warned last week that the deficit in the state budget could increase to 5 percent of gross domestic product (GDP) from an estimated 3.7 percent of GDP.

The warning was issued after the state budget was hit by a weaker rupiah, rising interest rates, and a delay in the collection of certain taxes.

News of an unexpectedly high inflation rate in March, and the continued downward trend in export earnings further undermined the market's confidence in the rupiah, he said.

Bank Indonesia (BI) has said that soaring inflation rates in the first three months of this year may force it to raise interest rates on its certificates.

But analysts warned the move would put at risk recapitalized banks that rely on earnings from government fixed-rate bond coupons, which might soon be lower than the banks' lending rates.

Khalil added that persistent corporate demand would keep the dollar bullish, and it was also gaining on declining foreign exchange reserves that limited BI's intervention capacity.

"If I were a currency trader, I would hold on to the dollar until I hear some goods news coming from the International Monetary Fund (IMF) review team," he said.

The IMF team is due to arrive on Wednesday to review the implementation of Indonesia's reform targets, and to draft new ones for more loan disbursement.

Indonesia needs the team's approval of its reform program before the IMF's board of directors in Washington can approve the long-delayed disbursement of a US$400 million loan tranche.

The rupiah ended at 10,875 against the greenback on Friday, compared with the previous week's closing at 10,415.

Legislator and currency analyst Theo Toemion also expressed his concern at how close to 11,000 the rupiah was trading.

"But there is no reason for the rupiah to breach 11,000, or even remain at its current position above 10,000," he said.

He blamed currency speculators, and BI's inadequate response to the attacks on the rupiah as the reasons behind the rupiah's persistent weakness.

"BI is hesitating: it should have gone all out if it wanted to fight speculators," Theo, a member of the House of Representatives Commission IX for financial affairs, said.

According to him, the central bank has imposed clear rules to curb speculative attacks against the local unit, yet BI has failed to implement them effectively.

Theo was referring to a recent BI ruling that limits the offshore forward trading of the rupiah for non-underlying (purely speculative) transactions.

After the ruling came out in January, speculation on the rupiah did subdue, and the local unit gained in stability, despite rising political tensions.

But since breaching the 10,000 level last month, the rupiah fell prey to speculation again, most notably in the non- deliverable forward (NDF) market in Singapore.

The NDF market circumvents BI's rules, giving rise to renewed offshore speculative attacks on the local unit.

Theo said also that BI should not hesitate to closely monitor the spot market for currency speculators.

"If necessary, BI must tighten trading in the spot market," he added.

He warned that the rupiah trading at 11,000 might cause legislators to summon BI's board of governors for a hearing.

"We (legislators) don't have to wait for the completion of the central bank law amendment to impeach the current board of governors," he said.

Meanwhile, stock analyst at PT BNI Securities Adrian Rusmana said the prolonged fall of the rupiah would continue to drag the local stock market down.

The Jakarta Stock Exchange composite index last week took more beating on lingering political worries, and the rupiah's steady descent.

Cautious bargain hunting shoved the index up to 364.34 before Friday's close. But overall, last week's trading failed to lift the index to the previous week's close of 381.05.

Adrian said the absence of fresh leads on the economic front and bearish sentiments in the regional markets would continue to depress the index.

"Unless the arrival of the IMF team boosts the rupiah, I don't think we can expect much next week," he explained.(bkm)