Rupiah may strengthen after polls: BI

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.