Rupiah off to 33-month high, heading for 8,000

Dadan Wijaksana, The Jakarta Post, Jakarta

Bank Indonesia (BI) said on Friday the rupiah could strengthen to the level of 8,000 per dollar provided there is further encouraging news from the country's economic activities.

BI senior deputy governor Anwar Nasution said that "If exports run well, oil prices remain high and a successful IPO (initial public offering) of Bank Mandiri," the local currency has a good chances of reaching that level.

Anwar was commenting on the rupiah's strong showing recently due primarily to a slumping U.S. dollar against most currencies in the world, coupled with increasing demands for the rupiah from foreign investors wishing to invest in the country.

On Friday, the local unit rose again to 8,275 per dollar, the highest level in the past 33 months, in what traders saw as the latest signs of more capital inflows here.

However, while admitting that a stronger rupiah would help sustain monetary stability, experts warned that it could also come at a price, especially when the appreciation takes place drastically.

StanChart economist Fauzi Ichsan told The Jakarta Post that the most important thing at the moment was to strike a balance between the good and the bad impacts of the rupiah's current rally.

"The good side of it is that we can expect a low rate of inflation as many of our goods are imported," Fauzi said, adding that high inflation would erode people's purchasing power.

While people's buying power remains strong, he said, it would prove beneficial for efforts to maintain the current strong domestic consumption, the main engine of the country's economic growth.

Moreover, a benign inflation could mean more leeway for the central bank to cut its interest rate in an attempt to push higher bank lending to the corporate sector.

But, the trend also has negative effects.

"Imagine an exporter who paid for imported raw material at Rp 9,000 per dollar four months ago, but then the firm has to receive payment for the products at an exchange rate of around Rp 8,200 or Rp 8,300.

"For export-oriented businessmen, the drastic change is not good," he said referring to the fact that most exporters here use raw materials from overseas.

The stronger rupiah does not only mean less earnings for exporters, it could also erode the competitiveness of exporters' in the global market, particularly when compared to exporters from nations whose currency had not been as strong as the rupiah.

Acknowledging these factors, Anwar said the central bank would carefully assess the rupiah's rising trend against the U.S. dollar to find out at what level the trend would still be tolerable.