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)