Rupiah's decline only temporary, central bank says

Urip Hudiono, The Jakarta Post/Jakarta

The central bank has maintained an upbeat view on the rupiah, saying its recent decline against the U.S. dollar would only be temporary, and that the local currency would be able to improve by the year's end.

"If we consider our macroeconomic fundamentals, then the rupiah will be able to strengthen over the medium to long term," Bank Indonesia deputy governor Aslim Tadjuddin said on Friday, citing how the country's economy managed to sustain an on-year expansion of 6.35 percent during the first quarter this year, following last year's final quarter of 6.67 percent.

"Last month's inflation rate had also dropped to 7.40 percent," he added. The country's on-year inflation rate surged to a two-year high of 8.81 percent in March, after the government decided to hike domestic fuel prices.

Aslim explained the rupiah had recently weakened not because of fundamental economic problems, but primarily due to external factors -- particularly the greenback's recent bullish rally against the euro and the Japanese yen.

"The euro weakened after the referenda in France and Netherlands rejected the EU constitution," he said.

"Meanwhile, in terms of internal factors, there still continues to be a strong demand from corporations for dollars."

Balancing out all these factors, however, Aslim said the rupiah would be able to reach a level of Rp 9,300 against the U.S. dollar, as forecast in the government's revision of the 2005 state budget, which is currently being discussed at the House of Representatives.

Aslim further said that the rupiah would also be supported by the fact that according to the central bank's "real effective" calculation of the local currency's exchange rate, the rupiah is actually still undervalued.

"At its current level of between Rp 9,585 and Rp 9,600, the rupiah is still undervalued by some 6 percent to 7 percent," he said.

The local currency indeed closed higher on Friday at Rp 9,590 per dollar -- up from Thursday's Rp 9,610 -- though mostly on another market intervention by the central bank that day.

The rupiah, however, has continued its downward trend for the third week, after BI governor Burhanuddin Abdullah said that the central bank's "babysitting" of the rupiah would only be temporary, urging the government to push its oil export revenues to strengthen its foreign exchange reserve.

The rupiah fell by as much as 0.05 percent this week, from its closing level of Rp 9,585 last week.