Rupiah woes may last longer, BI undeterred

Rupiah woes may last longer, BI undeterred

Rendi A. Witular, Jakarta

While acknowledging that the rupiah's woes may last longer due
to the global uncertainties at present, the central bank remains
confident that it will eventually stabilize as the country's
economic fundamentals remain strong.

Bank Indonesia deputy governor Anwar Nasution said on Friday
that once the uncertainties abated, the rupiah would return to
its "comfort level" of between Rp 8,300 and Rp 8,700 against the
U.S. dollar. It closed on Friday at Rp 9,065.

"Inflation remains under control, our banking industry is also
improving, and our foreign exchange reserves are sufficient to
help support the rupiah. So what are we afraid of?" Anwar said
during a weekly press conference.

"It is just a temporary decline, other countries are also
suffering from the same problem. It is just the global sentiment,
and it will gradually abate," he added.

He said that there was no reason for the central bank to
increase its benchmark interest rate despite the falling rupiah
and a planned hike in the U.S. rate.

He pointed out that the real interest rate level of around 2
percent at home was still relatively higher than the rates
overseas.

Such a competitive rate means that there is actually room for
a further cut in domestic interest rate, he added.

The real interest rate figure is obtained by subtracting the
current Bank Indonesia one-month benchmark interest rate of 7.32
percent from the annual inflation level of more than 5 percent.

"It must have been a stupid move by investors to pull out
their money from Indonesia, or to convert their rupiah-
denominated assets to dollar-denominated ones, since our real
interest rates are more competitive than those of other
countries," said Anwar.

The rupiah has lost more than 4 percent against the dollar
since the beginning of this month due to a combination of
external factors such as a possible hike in the U.S. interest
rate, surging oil prices and a possible sharp economic slowdown
in China as it struggles to tighten controls on its rapidly
expanding economy. On the domestic front, political uncertainty
leading up to the upcoming presidential election has also created
pressure on rupiah.

BI has placed the blame on four international banks based
here, which have allegedly used the market's weak sentiment to
speculate against the rupiah, driving the unit to its 14-month
low recently. BI last week issued warning letters to the four
banks over the practices.

Although unconfirmed, several local newspapers have reported
that the four banks are Standard Chartered Bank, ABN Amro,
Deutsche Bank and JP Morgan.

Anwar said that the warning letters were not against the free-
flow of foreign exchange policy, since the central bank had the
obligation to control the rupiah from fluctuating sharply, a
condition which would disturb the country's overall economy.

"The four banks are now still in the process of investigation.
The central bank has the authority to stabilize the rupiah so
that it will not go up and down drastically like a fever," he
said.

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Stock ends higher, rupiah slumps

The Jakarta stock market rose by 2.57 percent on Friday for
the third straight trading session on bargain hunting in some
shares and subsiding concern over interest rate hikes in the
United States.

The Jakarta Stock Composite Index ended 18.135 points higher
at 724.932 on volume of 1.09 billion shares worth Rp 1.08
trillion (US$120 million).

State-run telecommunications firm PT Telkom led the rally in
bluechips as it ended higher by Rp 150 to Rp 7,500. Its rival PT
Indosat was also up by Rp 225 to Rp 3,800.

Cigarette producer PT Gudang Garam gained Rp 400 to Rp 13,650,
its rival PT Sampoerna also surged by Rp 150 to Rp 5,000.
Automotive kingpin PT Astra International ended higher by Rp 100
to Rp 5,800, and Bank Mandiri was up Rp 50 to Rp 1,250.

Analysts said that foreign investors made up more than 50
percent of the transactions, as many stocks were already
considered cheap following massive losses last week.

Elsewhere, the rupiah failed to track the gains in the stock
market, as it closed lower again to Rp 9,065 per U.S. dollar from
Rp 9,050 on Wednesday.

Analysts said the decline was mostly driven by panic buying
from the corporate sectors as they feared that the rupiah's
depreciation would last for a long period of time, thus burdening
their costs for importing raw materials and repaying dollar-
denominated debts. -- JP