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Rupiah to become Asia’s best

Publication Date : 17-01-2014


With signs of recovery in the country’s balance of payments, Indonesia’s currency is heading for a sharp turnaround in 2014 to go from being Asia’s worst to best performer, analysts have predicted.

According to UK-based Lloyds Bank plc, which topped a Bloomberg poll for Asian foreign-exchange forecasts in 2013, the rupiah would strengthen by 6.8 per cent to 11,400 per US dollar by the end of this year.

Rupiah appreciation of such a magnitude was “not an overly bullish call” as the currency’s larger-than-expected decline last year offered the prospect of a larger rebound, thanks to the returning foreign inflows, according to Jeavon Lolay, Lloyds’ director of international economics.

“Indonesia is a high-yielding, large and fast-growing economy - its attraction will remain,” he told The Jakarta Post via email on Thursday.

“Government initiatives to allow more investment should support inflows,” added Lolay, who predicts the Indian rupee and Malaysian ringgit will be the next best-performing currencies after the rupiah in Asia, both rallying by 3 per cent.

Meanwhile, France-based Societe Generale presented an even more optimistic view, predicting that the rupiah would reach 10,250 against the greenback by the end of this year. That would be stronger than the government’s forecast of 10,500 as stipulated in the 2014 state budget.

“I believe that global investors have excessively punished Indonesia over the past year. In my view, the macro-fundamental risks are significantly overpriced,” Benoit Anne, Societe Generale’s head of global emerging market strategy in London, wrote in an email.

In 2014, the rupiah is set to show a “remarkable rally”, as it was now fundamentally cheap – even among the weakest currencies within emerging markets, she said. Anne predicted fund inflows would return to Indonesia, specifically in government bonds, whose current yields were attractive due to the sharp decline in inflation.

Bank Indonesia (BI) data shows that the rupiah depreciated by 26.2 per cent last year, the worst-performing currency in Asia. The decline was driven by heavy fund outflows triggered by talks of tapering of the US’ quantitative easing, with the capital flight exacerbated by Indonesia’s widening current-account deficit.

The current-account deficit, the major worry among foreign investors, would narrow to around 3 per cent of gross domestic product (GDP) in the fourth quarter, BI Governor Agus Martowardojo told reporters after a board of governors’ meeting last week.

That compares with a historic high of 4.4 per cent of GDP, or US$9.8 billion, in the second quarter last year.

Expectations of a swift improvements in the current-account deficit recently sparked positive sentiment toward Indonesia, drawing robust foreign fund inflows that have prompted rallies in the local currency, stocks and bonds markets.

This month, the rupiah advanced 0.4 per cent to 12,120 per dollar, the best monthly performance among the 11 most-traded Asian currencies after the Japanese yen, according to Bloomberg. The Jakarta Composite Index (JCI) rose 3.7 per cent this week to close at 4,412.49 on Thursday, the strongest performance in the region.

Meanwhile, government bonds have rallied for six consecutive days, the longest positive streak since October, with yields of benchmark 10-year notes already declining by 58 basis points within six days to touch 8.47 per cent on Thursday.

“What we are seeing right now is capital inflows because the financial market realizes that both our bonds and currency are already ‘undervalued’, given the positive outlook in the economy,” BI Senior Deputy Governor Mirza Adityaswara said.

But, BI would not become complacent over the latest improvements in macroeconomic data, he reiterated. Mirza also said that BI’s monetary stance — perceived by some as hawkish — “will not change”, while stating that the central bank should not set a target for the currency at a certain level.


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