Rupiah may strengthen after polls: BI

Rendi A. Witular, Jakarta

The central bank expects the rupiah to strengthen after the presidential election runoff, saying that the forming of a new government should eliminate political uncertainty and lure new foreign investment.

"The rupiah is likely to strengthen after the presidential election runoff, as investors and the business community will regain confidence after political uncertainty is removed," said Bank Indonesia (BI) Governor Burhanuddin Abdullah in a meeting with House of Representatives Commission IX for financial affairs on Wednesday.

"The rupiah is expected to gain early in the fourth quarter of this year amid the announcement of a new government. We also expect long-term investment to flow into the country, which will ensure the sustained stability of the rupiah," he said.

Burhanuddin did not mention how far the local unit would rebound. The 2004 state budget targets an exchange rate of 8,600 for the rupiah against the U.S. dollar.

The incumbent president, Megawati Soekarnoputri, will face her former top security minister Susilo Bambang Yudhoyono in the final round of the country's first direct presidential election on Sept. 20.

The local unit has been under severe pressure over the past couple of months, falling to around Rp 9,328 per dollar at the end of August, which is around 9.2 percent lower than at the beginning of the year, making the rupiah the worst performer among 15 Asia Pacific currencies, according to Bloomberg data.

Burhanuddin said the depreciation of the rupiah over the past couple of months was not only triggered by political uncertainty, but also by huge demand for the dollar from the corporate sector to finance imports.

According to a BI report, state enterprises, along with automotive and food companies, made the strongest demands for the dollar to finance the importation of raw materials for production. The dollar remains in demand as the companies are not foreign currency earners.

In its report to the House, BI said it had implemented several policies to help arrest the fall of the rupiah by absorbing excess liquidity in the banking sector, tightly supervising trade in foreign currency and other measures.

Burhanuddin said the implementation of such policies had more or less helped reduce the volatility of the rupiah. However, the country would need more long-term investment to flow in to ensure future stability of the rupiah.

Currently, foreign exchange reserves have been stockpiled primarily from short-term investment derived from the capital market sector, which has proven short-lived.

The sharp drop in the rupiah has sparked inflation concerns, coupled with rising oil prices and stronger domestic demand ahead of year-end festivities such as the Muslim Ramadhan fasting month in October, followed by Idul Fitri in November and Christmas in December.

Burhanuddin said there was still room for BI to raise key interest rates this year in order to help curb inflationary pressure and help stabilize the rupiah. The BI benchmark interest rate currently stands at 7.38 percent, with some economists predicting an 8 percent year-end rate.

In its report, BI estimates inflation to be 6 percent to 7 percent this year, higher than its initial target of below 6.5 percent. Last month, year-on-year inflation weakened to 6.67 percent from 7.2 percent in July.