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Rupiah Drops on Concerns of Budget Deficit, Japan Earthquake

March 11 (Bloomberg) -- Indonesia’s rupiah dropped for a second day on concern higher fuel prices will slow Southeast Asia’s largest economy, widening the government’s budget deficit, and after an 8.9 magnitude earthquake hit the coast of Japan.

All major currencies in Asia dropped as the earthquake sent waves crashing through coastal towns. Crude oil traded above $100 a barrel in New York this week. Higher crude prices may mean Indonesia’s budget deficit this year could be as much as 2.7 percent of gross domestic product, compared with a targeted 1.8 percent, according to Gundy Cahyadi, an economist at Oversea-Chinese Banking Corp.

“There is concern high oil prices will put a strain on the fiscal-deficit position and at some point the government will decide it needs to hike the fuel prices,” Singapore-based Cahyadi said.

The rupiah dropped 0.1 percent to 8,790 per dollar as of 3:15 p.m. in Jakarta, according to data compiled by Bloomberg. The currency was little changed from a week ago and slid to 8,808 earlier, the weakest in a week.

“The currency appeared stable before the knee-jerk reaction to the earthquake,” said Bambang Eko Joewono, head of the global-markets division at PT Bank UOB Buana in Jakarta. “We don’t know the extent of damage caused by the earthquake yet. Indonesia will be cautious on possible tsunami.”

Government bonds dropped, with the yield on the 8.25 percent note due July 2021 climbing two basis points to 8.39 percent today, according to midday prices from the Inter-Dealer Market Association. The rate fell 11 basis points this week.

Overseas funds increased their holdings of Indonesian government debt to 203 trillion rupiah ($23 billion) as of March 9, from 196 trillion rupiah at the end of last year, according to the finance ministry.

Bank Indonesia will allow the rupiah to appreciate “moderately” to help manage imported inflation, Governor Darmin Nasution said in Bali today. Capital inflows to Indonesia may be “slightly lower” this year because the U.S. economy is improving, he said.

To contact the reporter on this story: Khalid Qayum in Singapore at kqayum@bloomberg.net

To contact the editor responsible for this story: James Regan at jregan19@bloomberg.net.

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