Indonesia Rupiah Under Pressure Before Fuel Plan Enacted

Indonesia’s government needs to rein in fuel subsidies that have spurred a current-account deficit to support efforts by the central bank to stabilize the weakening rupiah, economists say.

Rupiah forwards rose the most in a year yesterday after Bank Indonesia increased the rate it pays lenders on overnight deposits and said it was ready to buy government debt in the secondary market to maintain monetary stability. Still, the spot rate weakened 0.3 percent to 9,860 a dollar, the most since May 16, according to prices from local banks compiled by Bloomberg. The spot rate fell a further 0.2 percent today.

“The rupiah remains weak as investors are still waiting for the fuel price increase and demand for dollars remains high,” Eric Alexander Sugandi, a Jakarta-based economist at Standard Chartered Plc, said yesterday. “As long as the government delays the fuel price increase, the rupiah will remain under pressure.”

President Susilo Bambang Yudhoyono has put off raising fuel prices since protests derailed a planned increase last year in a country where riots spurred by soaring living costs helped oust dictator Suharto in 1998. Curbing the government’s energy subsidies would reduce trade and current-account deficits that made the rupiah the worst performer in Asia after the Japanese yen among 11 most-traded currencies tracked by Bloomberg over the past year.

“Indonesia will increase fuel prices within days after the budget approval on June 17,” Deputy Finance Minister Mahendra Siregar said via telephone today.

Maintaining Stability

Bank Indonesia Governor Agus Martowardojo moved to boost confidence in the rupiah weeks after taking charge, unexpectedly raising the deposit facility rate, also known as the Fasbi, by a quarter of a percentage point to 4.25 percent effective yesterday. The increase was a preemptive step to maintain stability after the rupiah weakened and Bank Indonesia will ensure sufficient liquidity in the market, it said.

“Indonesia can’t depend only on Bank Indonesia’s policy,” said Anton Gunawan, chief economist at PT Bank Danamon. “The government needs to take immediate action to raise fuel prices as it will boost sentiment. As long as uncertainty about fuel costs persists, we’ll see continued volatility in the market.”

Indonesian policy makers have struggled to contain the rupiah’s plunge, with the country’s currency reserves dropping as the central bank sold dollars. The increase in the Fasbi rate was enacted only a day before today’s monetary policy meeting, where the benchmark reference rate was unexpectedly raised to 6 percent from a record-low 5.75 percent. All 19 economists surveyed by Bloomberg News had predicted no change in the reference rate.

‘Calming Influence’

The Fasbi rate “move came a little more than a day before its scheduled policy meeting, hinting at a degree of panic,” Robert Prior-Wandesforde, an economist at Credit Suisse Group AG in Singapore, said in a note yesterday. “It looks to have had a calming influence for now, although we are not convinced it will be long lasting and continue to expect at least another couple of Fasbi rate increases later this year and one 25 basis-point policy rate increase.”

The rupiah’s one-month non-deliverable forwards gained 1.6 percent, the most since June 2012, to 10,120 per dollar yesterday, data compiled by Bloomberg show. The contracts touched 10,412 on June 11, the weakest level since August 2009. Today, the rupiah spot rate had weakened as much as 0.7 percent to 9,925 per dollar before the rate increase, and later pared losses to trade at 9,880.

Cash Outflows

Overseas investors have pulled $1.9 billion from stocks and local-currency bonds in Indonesia the past two weeks, putting pressure on the rupiah as rising U.S. Treasury yields lure capital from emerging markets.

The Jakarta Composite Index erased earlier declines yesterday to rise for the first time in five days, with the benchmark jumping 1.9 percent, the biggest gain in almost nine months. Prior to yesterday’s gain, the index had lost almost a 10th of its value this month. Today, the gauge had lost as much as 2.8 percent, falling along with Asian equity markets, and pared losses to 1.2 percent as of 2:51 p.m. local time after the rate increase.

The rupiah’s weakness is temporary, Finance Minister Chatib Basri told reporters yesterday. Bank Indonesia will ensure the currency level reflects fundamentals, Martowardojo said.

Bank Indonesia is ready to supply dollars in a “large quantity” to stabilize the currency, as well as buy government bonds in the secondary market sold by overseas investors, Deputy Governor Perry Warjiyo said in a text message yesterday. The central bank is prepared to purchase government debt in any amount, he said.

Falling Reserves

Indonesia is consuming foreign-currency reserves at the fastest pace in Asia as policy makers struggle to contain the rupiah’s plunge. Reserves dropped 5.7 percent in a year to $105 billion in May as the central bank sold dollars to bolster the rupiah, while authorities from South Korea to Taiwan added to coffers, data compiled by Bloomberg show.

Standard & Poor’s cut its rating outlook on Indonesia’s debt to stable from positive last month, saying a stalling of reform momentum and a weaker external profile had reduced the chance of an upgrade over the next 12 months. Failure to lower subsidies in 2012 led to a record current-account gap, hurting the rupiah as foreign investors lost confidence.

Consumer prices are forecast by economists to accelerate as Yudhoyono’s administration plans to raise fuel prices to contain expenditure on subsidies. Yudhoyono has made any boost in fuel prices conditional on Parliament approving compensation programs for the poor. Inflation may peak at about 8 percent within three months of a price increase, Chua Hak Bin of Bank of America Corp. estimated.

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