How high will the rupiah go?
Dion Bisara | August 28, 2011

How high will the rupiah go? 

The Indonesian rupiah has been one of the best-performing currencies in the world this year, having risen by about 5% against the greenback. But, a strong rupiah is not everyone’s cup of tea and the central bank must walk a thin balancing line.



At the start of the year, the government assumed the rupiah would trade at around 9,250 against the dollar. Eventually, a new target was set at 8,700. On August 16, the currency was trading at 8,526, with many convinced it will appreciate further, albeit slightly.


High growth rates in Indonesia make the local economy attractive to international investors, compared to more stagnant economies such as those of the United States, Japan and Britain. Indonesia’s economy may grow 6.5% this year, after expanding 6.1% in 2010.

With corporate profits rising and bond yields high, Indonesia looks perfect. Indonesia’s 10-year bond yields 6.8%, compared with the US 10-year bond rate of around 2.2%.


On August 9 the central bank, Bank Indonesia (BI), kept its key overnight policy rate at 6.75% for the sixth straight month, helping to ensure growth in Southeast Asia’s biggest economy even as concerns rise that the United States might slip back into recession and Europe’s debt crisis threatens to spread to Italy, Spain and even France.


“Globally we may continue to see risk-on, risk-off episodes amid continued uncertainty in Greece and other European countries,” says Anton Hendranata, economist at Bank Danamon. “We do not rule out the rupiah dipping below 8,400 in the near term.”

Meanwhile BI governor Darmin Nasution has said he is confident that the latest turbulence in the global financial markets will have only limited impact on the Indonesian economy.


The central bank has indicated that even though it hasn’t set a target on the rupiah, it doesn’t rule out intervening to curb volatility. With inflation steady and the economy expanding faster than last year, BI has resisted the temptation of raising its key interest rate, which would make the rupiah and fixed-income assets even more attractive than they are already.


Traders and analysts say BI has been intervening in the currency market lately, suggesting that the central bank doesn’t want the rupiah to strengthen further and is comfortable with it at current levels, aiming to maintain the country’s export competitiveness.

Husni Daud, a rubber exporter from South Sumatra, put together his annual budget in January, and assumed that the rupiah would trade at 9,000. In early August, the rupiah moved to its strongest level since 2004 and his business has taken a beating as the currency gained more than 5%.


“If the rupiah weakens, I will be glad. I actually hope it goes back to 9,000,” says Husni, who exports around 3,000 tons of rubber a month to the United States, China and Japan. “Our revenue has been dropping because the rupiah strengthened.”


The rupiah’s position is a far cry from the depths of the East Asian financial crisis in 1997-1998, when it dropped to as low as 16,000. It still has a long way to go before reaching 2,400, the level before the financial crisis.


The current attractiveness of the rupiah raises fears of a ‘hot money’ crisis. But should there be a sudden outflow of capital from the bond market, finance ministry officials say they would be able to handle the situation by buying assets with idle cash.

Indonesia’s foreign reserves at the end of July stood at $122.7 billion, equivalent to more than six months’ worth of imports, according to CIMB Securities Indonesia.


The government believes the rupiah has gone as high as it will go and expects it to depreciate slightly in the second half of this year as investors move to assets such as gold that are traditionally viewed as safe.  Bambang Brojonegoro, head of fiscal policy at the Finance Ministry, said in early August that the rupiah is likely to depreciate slightly to reach 8,700, as indicated in the state budget.

Meanwhile gold shot up to more than $1,800 an ounce in early August and currently trades at around $1,700.


Lower import costs
 
While a strong rupiah might be bad for exporters by making their shipments less competitive, the currency’s strength helps to lower costs for importers such as Unilever Indonesia. The biggest listed maker of consumer products — from shampoo and detergent to ice cream and ketchup — reported that its loss from foreign exchange transactions narrowed to Rp2.6 billion ($304,000) in the first half from Rp11.9 billion in the same period last year.


Indonesians who work overseas are also wary of the rupiah’s strength. Agung, who works as a nurse in Kuwait and remits money to his wife and infant daughter, decided to hold the Kuwaiti dinar in the first half in spite of the rupiah’s rise.


“I still feel safe to hold some dinar, because, after all, my income is in this currency,” he says. “I only send to Indonesia just as much as necessary. We never know if something will happen.”


Still, there may be no holding investors back from the allure of Indonesian assets. Foreign net holdings of Indonesian bonds rose 27% to Rp248 trillion as of August 9 from the end of 2010. Rating agencies such as Moody’s Investors Services have indicated the possibility of raising Indonesia’s credit rating one notch to investment grade.


Meanwhile, Husni, the rubber exporter, said his profit has eroded to just 3%, a margin sufficiently low to tempt him to shut down business and place his money in the bank, where deposits carry around 7% interest. If the US economy slows, the biggest buyer of Indonesian rubber may place fewer orders for the commodity. Husni is wondering whether to shut down operations and lay off workers. But, he muses, “We simply can’t do that. If we did, where would our people go to work?”  GA

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