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."