The fading political fortunes of Indonesia’s leading pro-reform presidential candidate have turned the rupiah from a world-beater into a laggard on speculation the country will struggle to achieve lasting improvements to its trade balance.
After soaring 7.1 percent in the first quarter, the currency has slumped 3.6 percent against the dollar, the worst performance among 31 major peers. While surveys of strategists point to gains by year-end, bears are emerging, with banks from ABN Amro Bank NV to Morgan Stanley predicting a decline to levels beyond 12,000 per dollar, from 11,779 today.
The rupiah is turning sour after April elections resulted in a fragmented parliament and rivals of Joko Widodo, the business-friendly Jakarta governor better known as Jokowi, joined forces before July’s presidential vote. That’s adding to concern after Bank Indonesia warned last week that the deficit in the nation’s broadest measure of trade -- its current account -- could double this quarter.
“The presidential election is looking like a closer contest than before,” while “the trade deficit could remain an issue,” Khoon Goh, a currency strategist at Australia & New Zealand Banking Group Ltd. in Singapore, said in a June 4 interview. “Jokowi is seen as a business-friendly reformer, but there’s a chance he fails to secure a sweeping win.”
Goh sees the rupiah depreciating to 12,000 per dollar by Dec. 31. HSBC Holdings Plc affirmed on May 29 its forecast for a decline to 12,250, while ABN Amro last month predicted a slide to 12,500.
Morgan Stanley, which in 2013 coined the term “fragile five” to describe emerging-market currencies, including the rupiah, that are vulnerable because of their trade deficits, estimated a year-end level of 12,200.
While the rupiah has risen for the past three days, it’s still only about 1 percent stronger than its four-month low of 11,898 reached on June 5, prices from local banks show. The currency slumped 21 percent last year, before reaching a five-year low of 12,285 on Jan. 7.
It was a different story in the first quarter, when the deficit in Indonesia’s current account narrowed to 2.1 percent of gross domestic product, compared with a record 4.4 percent in the second quarter of 2013.
An official report on June 2 suggested those improvements may not last. The Central Bureau Statistics in Jakarta said imports exceeded exports by $1.96 billion in April, compared with the median prediction for a $178 million surplus in a Bloomberg survey of 20 economists.
“The concern is that with the large trade deficit, the current-account deficit will be wider than previously expected,” Nurul Eti Nurbaeti, the head of treasury research at PT Bank Negara Indonesia in Jakarta, said in a June 3 phone interview.
Widodo, who as governor of Jakarta has cut red tape and backed major infrastructure projects, is favored by the market. The rupiah surged to a five-month high three days after the Indonesian Democratic Party of Struggle announced him as its presidential candidate on March 14. He’s also leading the other leadership contender, former army general Prabowo Subianto, in the polls, though by a narrowing margin.
“Political uncertainty and rupiah volatility will likely keep investors cautious on Indonesia,” David Sumual, the chief economist at PT Bank Central Asia in Jakarta, said by phone on June 3. He said policy makers favor a weaker currency to make exports more competitive.
Investors can also benefit from the rupiah’s declines, which are more to do with the forthcoming Muslim month of fasting, starting in late-June, than economic fundamentals, according to Tim Condon of ING Groep NV.
“This current bout of weakness will probably prove to be a buying opportunity,” Condon, the bank’s head of Asia research in Singapore, said in a June 4 phone interview. “The trade data was bad largely because of seasonal buying ahead of the Ramadan festive season, which doesn’t warrant such a marked depreciation in the currency.”
ING predicts the rupiah will rally to 10,800 per dollar by the end of the year. The median of 21 strategist estimates in a Bloomberg survey is for a gain to 11,639 by Dec. 31, though that’s down from a forecast of 11,450 on April 29.
Investors have other reasons to be optimistic about the rupiah. Bank Indonesia lifted its main interest rate by 1.75 percentage points to 7.5 percent since May 2013, luring foreign investors who have pumped 70.83 trillion rupiah ($6 billion) into local-currency government bonds this year.
For a growing number of foreign-exchange strategists, the rate increases are masking a slowing economy.
GDP expanded 5.2 percent in the first quarter from a year earlier, the slowest pace since 2009 and down from 5.7 percent growth in the previous period. Bank Indonesia cut its full-year forecast last month to 5.1 percent to 5.5 percent, from as high as 5.9 percent.
The current-account and budget shortfalls, together with fuel and electricity subsidies, are also cause for concern, said Yii Hui Wong, a Singapore-based strategist at BNP Paribas SA. Those subsidies will account for about 15 percent of government spending this year.
“The rupiah’s outlook is shaky due to the uncertainty from the upcoming election and as Indonesia still faces the issues of having to deal with fuel subsidies and the country’s twin deficits,” Wong said in a June 5 phone interview. “Offshore investors are more cautious now.”