Indonesia is failing to convince foreign-exchange strategists that the rupiah’s world-beating gains this year are built on lasting improvements in the nation’s trade balance.
The rupiah has surged 7 percent to 11,375 per dollar this year, prices from local banks show, the most among 31 major currencies tracked by Bloomberg and almost double that of the next-best performer -- New Zealand’s dollar. Yet, in the same period, analysts surveyed by Bloomberg cut their median year-end forecast for the rupiah to 12,200 per dollar, 6.8 percent weaker than current levels, from 12,000.
While the deficit in Indonesia’s current account, which includes investment, was cut almost in half to 1.98 percent of gross domestic product in the fourth quarter, the shrinkage may prove temporary as bond issuance slows. The gap may expand to exceed 3 percent this year, Deutsche Bank AG and UBS AG predict.
“We are doubtful if the quick narrowing could be extrapolated into the next quarters,” Andy Ji, a Singapore-based strategist at Commonwealth Bank of Australia, said in a March 7 interview. “We’ve seen two months of consecutive net inflows, mainly on expanding issuance. We need to see more definitive signs of improvement.”
CBA, Australia’s biggest bank, sees the rupiah dropping to 11,500 per dollar by Dec. 31. The currency climbed to a four-month high of 11,344 on March 10, from 12,285 on Jan. 7, the weakest level since December 2008. The rupiah plunged 21 percent in 2013.
Sales of rupiah sovereign bonds have jumped 59 percent from a year earlier in 2014 as the finance ministry frontloaded issuance before a July presidential vote and in anticipation of higher global interest rates as the U.S. Federal Reserve cuts its stimulus program.
Overseas investors pumped a record 21.25 trillion rupiah ($1.9 billion) into local-currency bonds this year and $907 million into the country’s stocks, exchange data show.
The finance ministry has sold 72.4 trillion rupiah of domestic securities, compared with 45.5 trillion rupiah at this point last year. All told, Indonesia has already completed 42 percent of its record 362 trillion-rupiah sales target for 2014.
Even if those sales tail off, there are signs of optimism in the economy that may support the rupiah.
Annual increases in consumer prices slowed last month for the first time since September, easing to 7.75 percent from a peak of 8.22 percent in January. Foreign-exchange reserves rose to $102.7 billion in February, the highest since May 2013.
Indonesia’s fundamentals are “much better than perceived,” said Benoit Anne, the head of global emerging-market strategy at Societe Generale SA in London. The French lender has the most bullish year-end estimate for the rupiah of the 28 forecasters in Bloomberg’s survey, predicting a 3.4 percent rally to 11,000 per dollar.
“The rupiah after its huge slide is attractive,” London-based Anne said March 7 by e-mail. “Some political noise is likely ahead of elections, but not a huge policy making risk.”
Legislative polls will be held in April and Indonesians will vote again in July to choose a successor to 64-year-old President Susilo Bambang Yudhoyono, who has led the country since 2004 and is prohibited from running for a third term.
“The key thing we’re looking for is the upcoming elections outcome,” Prateek Gupta, a Singapore-based strategist at Nomura Holdings Inc., said in a March 11 interview. “Beyond political risks, we believe the recent improvement in the current account is likely to prove unsustainable.”
Nomura, Japan’s largest brokerage, is expecting broad-based U.S. dollar strength that will put pressure on Asian currencies and prompt the rupiah to fall to 12,575 by year-end, Gupta said.
The current-account deficit of Southeast Asia’s largest economy narrowed from 3.8 percent of output in the third quarter and a record 4.4 percent in the preceding three-month period. The deficit will be 2.8 percent of GDP for the whole of 2014, more than the central bank’s target of 2.5 percent, according to the median of 16 economist forecasts in a Bloomberg survey.
The country’s trade balance swung back to a shortfall of $431 million in January, from a $1.5 billion surplus in December, as a ban on mineral ore shipments took effect and evidence emerged of a slowdown in China, Indonesia’s biggest export market.
Weakness in commodity prices, particularly thermal coal, could derail some of the improvement in the current account, Jonathan Cavenagh, a strategist at Westpac Banking Corp. in Singapore, said in a March 10 report. The lender forecasts the rupiah will weaken to 11,841 by year-end.
Indonesia is the world’s largest exporter of coal for electricity generation, and the price per ton of the commodity at Australia’s Newcastle port, used as a benchmark in Asia, has fallen 12 percent in 2014 to a four-year low of $74.30.
“A lot of good news is priced into the near-term outlook,” Cavenagh said. “With U.S. yields pushing higher and renewed concerns surrounding the China outlook, the degree of portfolio inflow support may not persist.”