Indonesia central bank calms rupiah market fears

Business Desk in Jakarta/The Jakarta Post
Asia News Network

Jakarta (The Jakarta Post/ANN) - The Indonesian central bank is confident that the recent steep fall in the value of the rupiah will be short-lived, saying the currency will be stronger in 2013 compared to last year. In 2012 the rupiah was the worst performing currency in the region.

Bank Indonesia (BI) Deputy Governor Hartadi A. Sarwono said on Friday that the rupiah would be likely be shored up by a larger surplus in the balance of payments this year.

The country will remain a major destination for overseas funds, both in direct and portfolio investments.

"From the currency side, going forward, this should result in a stronger rupiah," he said.

Thanks to foreign funds flowing into the country, Indonesia posted a US$800 million surplus in its balance of payment in the third quarter last year, and the BI forecasts a figure of $1.5 billion in the fourth quarter.

Despite Indonesia's healthy economic growth, the rupiah was the worst-performer last year among Asia's 10 most-active currencies (excluding the Japanese yen). The decline of 5.9 percent, according to analysts, was attributed mainly to concerns over the trade deficit.

Trade Minister Gita Wirjawan has estimated that the deficit would remain around $2 billion this year, the same level recorded last year, which was an all-time high.

The shortfall last year has worsened the current account deficit, which has already been performing poorly for three consecutive quarters.

This alarming current account situation is attributed by many to investment growth, which has sucked in imports of capital goods, coupled with high oil imports to feed the soaring consumption of subsidized fuel.

The global oil price, Hartadi conjectured, would decline this year and ease pressure on the current account deficit, consequently reinforcing the rupiah.

"Our current account deficit will narrow because imports will decline and exports will improve in line with the recovery of the world economy," Hartadi said.

The rupiah fell 0.3 percent on Friday to 9,685 to the dollar as of 3.29 p.m. in Jakarta, Bloomberg reported. The currency reached 9,785 on Jan. 2, matching the Dec. 21 level which was its weakest in three years.

The 2013 State Budget requires that the rupiah trades around 9,300 to the dollar this year.

Government officials have insisted that such a figure can be achieved, predicting that the archipelago will continue its reign as the darling of overseas investors, drawing in funds from both portfolios and foreign direct investment (FDI).

Finance Minister Agus Martowardojo predicted investments would become the major engine of growth in 2013, while Investment Coordinating Board (BKPM) Chairman M. Chatib Basri claimed that Indonesia still had at least 260 trillion rupiah ($27 billion) of FDI in the pipeline.

Analysts, however, disagreed.

Any strengthening of the rupiah in 2013 may be "limited", said Bank Danamon chief economist Anton H. Gunawan, forecasting the currency would hover around 9,500 this year.

"It's true that the net influx of FDI and portfolios was substantial, but this does not offset the current account deficit," he said on Friday.

The issue facing the central bank is the probability that strengthening the rupiah will drain BI's foreign exchange (forex) reserves, which the central bank is "keen to maintain at a good level".

BI is "unwilling to give any signal of a deteriorating position", Anton said.

BI's forex reserves stood at $112.80 billion in December, up from $111.3 billion in November, their highest level for six months.

Concerns about rupiah stability in 2013 are also derived from Indonesia's plan to considerably reduce its debt, with the 2013 state budget stipulating that the government would convert an extra 19.4 trillion rupiah to US dollars to service foreign debts.

The plan will trigger "disturbances in the currency market", the President's Economic National Committee (KEN) warned in its annual report released in December.