Rupiah set to weaken as euphoria abates

Rupiah set to weaken as euphoria abates

JAKARTA (JP): Fading market euphoria inspired by the new
government could prompt profit takers and corporate U.S. dollar
hunters to repurchase the greenback, sending the rupiah down this
week, analysts said on the weekend.

Currency analyst Wi Wan at PT Vickers Ballas Tamara said that
market praise for the new government had already begun to wear
off during last week's trading.

"We will see more of the fundamental dollar demand driving the
market," he told The Jakarta Post.

He said the rupiah gains made in previous weeks stemmed partly
from confidence that the new government could restore ties with
the International Monetary Fund (IMF).

The IMF's announcement that it planned to visit Jakarta this
week further helped boost market sentiment and bolstered the
upbeat sentiment for the new government.

Now that this confidence had already been factored in, the
rupiah was set to face real supply and demand factors, Wi Wan
said.

With massive foreign corporate debts due to mature later this
year, he said that this meant more pressure for the rupiah in the
near future.

On the fundamental side of Indonesia's economy, the market had
also yet to see concrete progress, he added.

He said positive economic growth during the second quarter,
though surprising, had failed to impress the currency market.

During that period, Indonesia's economy, as measured in gross
domestic product (GDP), grew by 0.18 percent compared to the
first quarter.

Many analysts predicted smaller or even negative growth for
the second quarter, as sluggish foreign economies hurt export
sales.

Indonesia's GDP grew by 3.52 percent during the second quarter
on an annualized basis, raising hopes that it may exceed the
government's target of 3.5 percent for the entire year.

The GDP announcement last Thursday was of no help to the
rupiah, which took a steep fall that dealers attributed to
profit-taking.

The rupiah had been steadily gaining after President Megawati
Soekarnoputri unveiled her "market friendly" Cabinet.

A buoyant market propped the rupiah into the 8,000 per U.S.
dollar territory last Monday from 9,325 two days earlier, prior
to the Cabinet announcement.

However, Wi Wan attributed the sharp gains as primarily a
result of Bank Indonesia intervention, which encouraged players
to dump the dollar.

"The rupiah has firmed too high in too short a time ... this
is likely to be the work of Bank Indonesia," he explained.

Turning to external factors, Wi Wan said an expected interest
rate cut by the U.S. Federal Reserve would be unlikely to affect
the market here.

"The Fed has cut its rate many times since early this year.
The impact on the rupiah has been insignificant thus far," he
said.

Analysts predicted this week that the Fed would implement its
seventh interest rate cut, with another 25 basis point reduction
expected to reduce the rate to 3.50 percent.

Wi Wan said Bank Indonesia would maintain its rates, despite
calls by the government to lower them after the Fed rate cut.

Coordinating Minister for the Economy Dorodjatun Kuntjoro-
Jakti said he expected the central bank to follow the Fed rate
cut.

However, the central bank has said it saw no need for any
drastic rate cuts until after Indonesia's economy showed concrete
signs of recovery.

"BI (Bank Indonesia) set its rates high to reduce the supply
of primary money and to keep inflationary pressure in check," Wi
Wan said.

Primary money refers to the volume of currency in circulation,
in addition to funds held at banks and the reserve funds of
broker banks deposited at Bank Indonesia.

Bank Indonesia Governor Sjahril Sabirin has said the supply of
primary money must come down from the current level of Rp 110
trillion (about US$12.64 billion) to Rp 108 trillion.

Sabirin said the rupiah's recent gains were not sufficient to
ease liquidity in the money market.

During trading last week, which was shortened by Indonesia's
Independence Day holiday on Friday, the rupiah firmed to 8,740
from 9,110 the week before.

Wi Wan predicted the rupiah to hover between 8,500 to 9,000
throughout this week.

According to him, the rupiah's real exchange value should be
below 9,000.

On the stock market, the Jakarta Stock Exchange (JSX)
Composite Index fell slightly last week to 435.32 from 435.67 the
week before.

Stock analyst Baradita Katoppo of PT Inti Binar Andalan
Sejahtera said the stock market would look for clues in the
rupiah's movement.

"If the rupiah strengthened, it would raise the share prices
of Astra and its subsidiaries," he said.

The widely diversified PT Astra International is saddled with
huge foreign debts, payment of which are not due until next year.

The shares of pharmaceutical companies relying on imported raw
materials would also gain from a stronger rupiah, Baradita said.

Meanwhile, he said the shares of PT Telkom and PT Indosat may
lose out with a stronger rupiah.

Telkom and Indosat are both listed at the New York Stock
Exchange, making them vulnerable to arbitration trading.

A stronger rupiah would make their Indonesian shares more
expensive in terms of U.S. dollar value, leading investors to
dump the local shares in favor of buying those overseas.

For next week, Baradita expected trading to be range bound
between 427 and 447.(bkm)