Rupiah to further strengthen in near future

Rupiah to further strengthen in near future

Dadan Wijaksana, The Jakarta Post, Jakarta

The sound performance of many of the country's macroeconomic
indicators is expected to continue for the rest of the year, on
the back of a relative strengthening of the rupiah thanks to
continued capital inflows and the U.S. dollar's faltering trend,
economists say.

Fauzi Ichsan, StanChart economist, said in the bank's latest
economic bulletin that the local unit had a good chance of
strengthening to a level beyond 8,000 in the next few months.

"The rapid fall in the dollar against the euro, the yen and
regional currencies, as well as the acceleration of capital
inflows from offshore, have greatly helped the rupiah.

"Continuous capital inflows, albeit 'hot money' that could
flow out just as quickly, may further strengthen the rupiah to
7,800 in the third quarter of 2003," he said.

He went on say that a stronger rupiah would reduce import
prices and hence inflation, which would lead Bank Indonesia to
further cut its benchmark interest rate.

While the pace of the U.S. economic recovery remains sluggish,
and weighs heavily on the dollar's performance, support from the
rupiah is expected also to come from capital inflows attracted by
high-yield local bonds, undervalued stocks, bank sales and sales
of assets under the supervision of the Indonesian Bank
Restructuring Agency (IBRA).

By the end of the year there will have been a total of Rp 15
trillion worth of corporate bonds issued, of which Rp 9 trillion
are already on the market.

Foreign investors are expected to put more money in the
country on the government's plans to offer a 15 percent stake in
Bank Mandiri -- the country's largest bank.

Moreover, IBRA also plans to auction off debts and collateral
from its largest remaining debtors, including Texmaco Group,
Chandra Asri Group and Bakrie Group. Those three have a combined
face value of around US$2.5 billion.

All these factors should prove helpful for the local currency,
as demands for the rupiah will be huge in a relatively short span
of time.

However, towards the end of the year, as political campaigns
for the 2004 election begin and market players back off from
their trading and investment positions, the rupiah may weaken
back to 8,000, said the bulletin.

"This would help reduce full-year inflation to around 7
percent and encourage BI to reduce its interest rate to around 9
percent by the end of the year."

Paragraph ONE, an independent research journal on economy and
investment produced by LPEM-FEUI, IBAS and CPS, also painted a
positive outlook for the country's macroeconomic condition,
although it released more conservative figures.

It estimated the rupiah would remain at 8,300 relative to the
greenback -- around the same as the current level -- by the end
of this year, while inflation would hover below 9 percent and
BI's interest rate at around 10 percent by the end of the year.

It also agreed that the strengthening of the rupiah was helped
by the continued capital inflows from investors.

"This reflects investors' confidence on Indonesia as a safe
investment target, compared to other countries in the region,
which are still suffering from the outbreak of SARS."