Rupiah Seen Going to First From Worst at Lloyds: Southeast Asia

The rupiah will go from worst to first among Asian currencies this year as Indonesia’s resilient economy and a shrinking current-account deficit draw funds to the nation’s assets, the most accurate forecaster says.

The currency will rally 6.8 percent in 2014 to 11,400 per dollar, recouping a third of last year’s 21 percent plunge, according to Lloyds Banking Group Plc, which had the closest estimates in the last four quarters as measured by Bloomberg Rankings. Societe Generale SA, the fifth-best, sees the rupiah at 10,250 by year-end, compared with the 12,200 median estimate of 23 analysts surveyed by Bloomberg. Among Asia’s 10 biggest economies, only China is expanding faster than Indonesia.

The Southeast Asian nation’s current-account deficit swelled to a record in the second quarter of 2013, denting investor confidence just as the Federal Reserve signaled plans to curb stimulus that fueled demand for emerging-market assets. Last year’s slide in the rupiah battered imports, driving the trade surplus to a 20-month high in November and paving the way for a rebound in the currency.

“We think the rupiah is undervalued at this level given its growth dynamics,” Jeavon Lolay, director of global research at Lloyds, said in a telephone interview from London yesterday. “The recent trade numbers have been positive. We have a more positive outlook on global growth as well, which should help the export recovery in the second half.”

Best Performer

The Indonesian currency, which touched a five-year low of 12,285 per dollar on Jan. 7, has gained 0.4 percent this month to 12,120 as of 1:02 p.m. in Jakarta, prices from local banks show. That’s the best performance among the 11 most-traded Asian exchange rates after Japan’s yen. Lolay sees India’s rupee and Malaysia’s ringgit as the next best in Asia this year, both rallying 3 percent.

The International Monetary Fund predicts Southeast Asia’s largest economy will grow 5.5 percent in 2014, compared with an average 5.1 percent expansion for emerging nations and 2 percent for advanced economies, estimates released in October show. Indonesia’s gross domestic product increased 5.62 percent in the three months through September from a year earlier, slowing for a fifth quarter.

Overseas investors have bought $239 million more Indonesian shares than they sold this year and pumped a net 2.08 trillion rupiah ($172 million) into local-currency debt, according to official data. The revival in confidence was highlighted by the nation selling $4 billion of dollar bonds last week, with four times as many bids. That came after a domestic dollar sale in November failed to reach its target.

High Returns

Some of the highest yields in Asia are luring foreign funds to the country after the central bank raised its benchmark interest rate by 1.75 percentage points last year. Indonesia’s 10-year government bonds yield 8.51 percent, more than double similar-maturity rates of 4.16 percent in Malaysia and 4.29 percent in the Philippines. Among the region’s emerging markets, only India’s 8.63 percent is higher.

“I am bullish on high-yielding cheap currencies and the Indonesian rupiah is probably the best example of that category across the whole emerging-market FX universe,” Benoit Anne, London-based head of emerging-market strategy at Societe Generale, wrote in e-mailed comments on Jan. 7.

Indonesia posted a trade surplus of $777 million in November as imports fell 11 percent, the most in four years. That was the third excess in four months, following a 10-month run in which only one surplus was achieved. If the trend continues, it will reduce pressure on the nation’s current account deficit, which ballooned to a record 4.4 percent of GDP in the second quarter of last year before narrowing to a 3.8 percent shortfall in the following three months.

Slowing Inflation

The full-year deficit was probably 3.5 percent in 2013 and the gap will stay below 3 percent this year, Bank Indonesia estimated Jan. 9. Inflation is also expected to slow after exceeding 8 percent in each of the six months through December. Consumer prices will increase 6.5 percent in 2014, according to the median estimate of 21 economists surveyed by Bloomberg.

“We expect inflation to fall to close to 5 percent and Indonesia’s current-account deficit to improve by about $8 billion by year-end,” Ray Farris, the global head of currency strategy at Credit Suisse Group AG in Singapore, wrote in an e-mailed reply to questions on Jan. 8. “We think emerging-market currencies are likely to be weak and volatile in general over the next few months.”

The lender, the most accurate forecaster for the rupiah in the fourth quarter of last year, expects the currency to be at 12,350 per dollar by year-end.

Export Ban

Indonesia’s partial ban on mineral ore exports, which came into effect Jan. 12, is expected to reduce shipments in the short term and have a negative impact on the country’s current account. The prohibition, which wasn’t as strict as what was initially proposed, will widen the deficit in the broadest measure of trade by 0.3 percent of GDP this year, David Sumual, chief economist at PT Bank Central Asia in Jakarta, said in an interview last week.

“We remain concerned about Indonesia” because of its large current-account deficit against the backdrop of lackluster commodity exports, Taimur Baig, chief economist for Asia at Deutsche Bank AG, the world’s largest currency trader, said at a media briefing in Singapore on Jan. 8.

Fed Chairman Ben S. Bernanke said Dec. 18 the central bank would trim its $85 billion of monthly stimulus to $75 billion from January and would gradually reduce bond purchases this year if inflation and the job market continued improving. The Fed will taper stimulus in $10 billion increments over the next seven meetings before ending them in December, according to a Bloomberg survey on Jan. 10.

Restrictions Loosened

Indonesia will open up its seaports and airports to 95 percent and 49 percent foreign ownership, respectively, from 49 percent and zero percent, the Investment Coordinating Board said last month. The country will also ease restrictions for power plants and pharmaceutical businesses.

Voters will go to the polls in April and July for parliamentary and presidential elections and President Susilo Bambang Yudhoyono is prohibited from running for a third five-year term. Lloyd’s Lolay expects the incoming government will continue with reforms to attract investment as the Fed unwinds its stimulus.

“I wouldn’t expect anybody to come in and not do anything,” Lolay said. The Fed’s announcement last month had also given investors more certainty and will support investment in emerging-market assets, he said.