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