Rupiah Weakens as Rate Rise Signals No Current-Account Relief

Indonesia’s rupiah and stocks fell for a fourth day after yesterday’s surprise interest-rate rise fueled speculation current-account data today will show little improvement from the second quarter’s record deficit.

The currency weakened 0.4 percent to 11,644 per dollar as of 12:11 p.m. in Jakarta, according to prices from local banks. It touched 11,675 earlier, just shy of the four-year low of 11,680 on Sept. 30. The rupiah has tumbled 6.1 percent since trading at a seven-week high on Oct. 25. The Jakarta Composite index of shares fell 2 percent, taking its decline this week to 4.1 percent. The yield on 10-year government bonds rose four basis points to 8.46 percent, the highest since September.

“We think the current-account improvement will be disappointing,” said Mika Martumpal, head of treasury research and strategy at PT Bank CIMB Niaga in Jakarta. “It’s too soon to expect a significant improvement as there is a lag in the impact of policy moves on the real economy.”

In a move that was predicted by only one of 25 analysts surveyed by Bloomberg, Bank Indonesia raised the reference rate to a four-year high of 7.5 percent yesterday. Foreign funds pulled $264 million from Indonesian stocks in November as the improving U.S. economic outlook spurred speculation the Federal Reserve will reduce stimulus as soon as this year.

‘Quite Disappointing’

Bank Indonesia, which has raised its key rate by 1.75 percentage points in the past five months, said yesterday’s increase is aimed at narrowing the current-account gap. The shortfall will be 3.7 percent to 3.8 percent of gross domestic product in the third quarter, from a record 4.4 percent in the previous three months, it estimated yesterday.

“The main concern is how much the currency has weakened over a short span of time,” Ho Woei Chen, a Singapore-based economist at United Overseas Bank Ltd., the city-state’s third-largest lender, said in an interview yesterday. The rate increase indicates today’s figures will be “quite disappointing,” she said.

UOB says the rupiah will decline to 11,700 per dollar by year-end. Barclays, the most-accurate rupiah forecaster over the past four quarters, says it will drop to 11,750.

BNP Paribas SA, the third most-accurate rupiah forecaster, sees the current-account deficit easing to $9.2 billion last quarter, compared with Bank Indonesia’s estimate for $8.4 billion and the all-time high of $9.8 billion in the previous three months. Barclays sees the broadest measure of trade narrowing to $7.7 billion before widening again in the fourth quarter. Only a shortfall of less than $5 billion would be positive for the currency, UOB’s Ho said.

Tightening Cycle

The country unexpectedly posted a trade deficit in September, following a surplus the previous month, a government report showed Nov. 1. That data indicates there will be “little change” in the third-quarter current account from the previous period, Tim Condon, ING Groep NV’s Singapore-based head of Asia research, wrote in a research note today.

Bank Indonesia has embarked on its most aggressive tightening cycle to address the balance-of-payments deficit since it introduced the reference rate in 2005. The central bank will “claw back most” of this year’s rate increases in 2014, ING’s Condon wrote in the note.

“We think the relatively slow improvement of the current-account deficit in the third quarter helped shape the decision,” Helmi Arman, Jakarta-based economist at Citigroup Inc., the only analyst to have predicted the rate increase, wrote in a report yesterday. “The central bank, as a guardian of last resort for the current-account deficit, has demonstrated its stronger commitment to tackling this deficit.”

Reduce Imports

The rupiah’s current level is needed to reduce imports, Perry Warjiyo, deputy governor at the central bank, said Nov. 8, when the exchange rate was 11,410 per dollar. The currency at 9,400 to 9,500 is not suitable for a country with a current-account shortfall, Senior Deputy Governor Mirza Adityaswara said this week. The rupiah has fallen 17 percent this year, the most in Asia.

“The key thing is that the current account will narrow,” said Leo Rinaldy, a Jakarta-based economist at PT Mandiri Sekuritas, a unit of the nation’s largest lender by assets, which forecasts a third-quarter gap of 3.7 percent of GDP. “The rupiah is now more reflective of market forces and it will be helpful in fixing the external imbalance.”

PT Telekomunikasi Indonesia was the biggest drag on the Jakarta share index today, falling 4.6 percent. PT Bank Mandiri slid 3.9 percent and property developer PT Lippo Karawaci retreated 3.1 percent.

Challenging Fundamentals

One-month implied volatility in the rupiah, a measure of expected moves in the exchange rate used to price options, fell 16 basis points, or 0.16 percentage point, to 15.02 percent, data compiled by Bloomberg show. One-month non-deliverable forwards were steady at 11,618 per dollar, 0.2 percent stronger than the spot rate. A fixing used to settle the contracts was set at 11,473 by the Association of Banks in Singapore today, from 11,427 yesterday.

Monetary tightening contributed to the nation’s growth slowing for a fifth straight quarter in the three months through September. The economy expanded 5.62 percent last quarter, the least since 2009, data showed this month.

“We believe the rate hike will provide near-term support to the rupiah, but it’s likely to be short-lived,” Prakriti Sofat, a Singapore-based economist at Barclays, said in an interview yesterday. The “increased credibility of the central bank is a positive for the currency, however fundamentals remain challenging,” she said.

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