Rupiah Forecasts Cut as Central Bank Eases Grip: Southeast Asia

Analysts are lowering their rupiah forecasts by the most in 18 months as Bank Indonesia allows the exchange rate to more accurately reflect worsening exports and an exodus of funds from the nation’s stocks and bonds.

The median estimate for end-2013 dropped 2.4 percent to 10,100 per dollar in July, the biggest decline since January 2012, according to data compiled by Bloomberg. Macquarie Group Ltd., the second-most accurate forecaster in the past year, cut its view by 3.8 percent to 10,600 on July 23, the day the rupiah fell by the most in 13 months. Among banks that freshened projections since then, BNP Paribas SA sees 10,800, Credit Suisse Group AG 10,597 and Barclays Plc 10,333.

Indonesian exports fell for 15 straight months through June as coal, palm oil and tin prices plummeted, contributing to a current account that has been in deficit for six quarters through March. Concern the Federal Reserve will cut stimulus has triggered $3.6 billion in outflows from stocks and bonds in the past three months, while Bank Indonesia has raised its benchmark rate by 75 basis points over the past two meetings to stem inflation that surged to a four-year high in July.

“The recent depreciation of the rupiah is helping to take the currency toward levels more consistent with fundamentals,” Prakriti Sofat, a regional economist at Barclays in Singapore, said in a July 30 interview. “Whilst the recent rate hikes from the central bank were a positive step, we think it may not be enough against a backdrop of Fed tapering and associated dollar strength.”

Worst Performer

The rupiah fell 3.4 percent in July to 10,278 per dollar, prices from local banks show. That was the biggest drop since February 2009 and the sharpest depreciation among 24 emerging-market currencies tracked by Bloomberg. The rupiah lost 1.8 percent in the week through July 26, including a 1.3 percent decline on July 23, the day Bank Indonesia said the exchange rate was moving toward a new equilibrium that is in line with economic fundamentals.

The spot rate, which fell 0.1 percent to 10,280 per dollar as of 12:30 p.m. today in Jakarta, is weaker than the median year-end forecast, reflecting the fact that 17 of the 27 estimates were made before the central bank allowed a more rapid slide on July 23. The rupiah is now trading 1.1 percent stronger than the one-month non-deliverable forwards, compared with a premium of as much as 5 percent in June.

Inflation accelerated to 8.6 percent in July from 5.9 percent the previous month, official data showed yesterday, after the government increased the price of subsidized gasoline in June by 33 percent. Consumer prices will advance 6 percent this year, according the median estimate in a Bloomberg survey.

Basic Balance

Indonesia will still spend 199.85 trillion rupiah ($20 billion) subsidizing fuel this year, according to the revised 2013 budget. The nation’s current-account shortfall will probably widen to $8 billion in the second quarter, from the $5.3 billion gap in the first three months of 2013, and remain in deficit until at least the third quarter, Bank Indonesia Deputy Governor Perry Warjiyo said on July 30.

The current-account shortfall exceeded foreign-direct investment in the country for the two quarters through March, official data show. This “basic balance” deficit is the main factor influencing the direction of the currency, said Helmi Arman, a Jakarta-based economist at Citigroup Inc., the most accurate rupiah forecaster over the past year, which has a year-end estimate of 10,158 per dollar made on July 16.

Forex Reserves

“Because of this gap, a stall in the inflows of portfolio investments is already enough to exert pressure on the balance of payments and the rupiah,” he said in a July 29 interview. “There need not necessarily be a capital outflow.”

Indonesia’s foreign-exchange reserves fell $7.1 billion, the biggest drop since September 2011, to $98 billion in June, official data show, as the central bank defended the currency. Reserves probably declined at a slower pace in July to about $94 billion to $96 billion as Bank Indonesia reduced intervention, Leo Rinaldy, an economist at PT Mandiri Sekuritas in Jakarta, wrote in a July 30 research note.

Credit Agricole CIB maintained its year-end forecast for the rupiah at 9,890 per dollar, the only one of 10 analysts that submitted new estimates since July 23 to predict the currency will strengthen beyond 10,000. The lender is waiting to gauge the reaction to the Fed’s possible stimulus reduction, said Dariusz Kowalczyk, a Hong Kong-based strategist.

“By the end of the year, two factors will have changed,” he said in a July 31 interview. “Inflation will have begun to decline and the market will learn to live with the idea of Fed tapering, so sentiment will improve.”

Structural Problems

Southeast Asia’s largest economy posted trade deficits in eight of the nine months through June. The price of palm oil has fallen 23 percent over the past 12 month in Kuala Lumpur, while thermal coal and tin have dropped 15 percent and 12 percent, respectively, in 2013, according to data compiled by Bloomberg.

Indonesia’s terms of trade are worsening and one way to address this is to allow the currency to weaken, Khoon Goh, a foreign-exchange strategist at Australia & New Zealand Banking Group Ltd. in Singapore, said in a July 30 interview. The government needs to boost infrastructure spending and lure more foreign investment to the oil and gas and mining industries to remedy structural problems in the economy, he said.

“The fact that Bank Indonesia was trying to hold the rupiah previously at above 10,000 was never sustainable given that it was eroding the level of their reserves,” Goh said, adding that his year-end estimate was 10,350 per dollar. “The rupiah will continue to depreciate as the country needs to address the current-account deficit, which is structurally weak.”

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