The rupiah strengthened against the US dollar this week. (Photo: Adek Berry, AFP)
The rupiah changed track and strengthened against the dollar in the past week, an upward movement that the Bank Indonesia chief says may have to do with a likely depreciation in the value of the US dollar.
However, despite a short-term increase in the amount of foreign money coming into the country, with hedge funds now believed to be once again investing here, analysts warn that this recent bout of investor confidence may just be a flash in the pan fuelled by hot money.
The currency continued its upward rally on Friday along with other regional currencies, including the Malaysian ringgit, the Singapore dollar and the Korean won, as foreign investors regained confidence in riskier portfolios that offer higher returns, including Indonesian stocks and bonds.
According to Bloomberg's data, the rupiah rose 1.9 percent this week, its biggest weekly gain of the year, to 11,775 per dollar as of 5:46pm. The won also gained 5 percent this week to 1,412.50 per dollar at the 3 p.m. local close, according to Seoul Money Brokerage Services Ltd. Malaysia’s ringgit rose 1.7 percent to 3.6440. Along with the Singapore dollar, these currencies completed their biggest weekly gains since the five days ended Dec. 19.
Economists here and overseas have for some time predicted that the US dollar would eventually weaken dramatically against other currencies this year, as money supply in that country increases because of President Obama’s stimulus and financial sector rescue packages.
Bank Indonesia Governor Boediono speculated on Friday that a long-term weakening of the dollar may be setting in. He said that the rupiah would continue to strengthen in the medium term against the greenback as the dollar supply increases.
“In the medium term, the US dollar will tend to weaken against other currencies. The recently announced policies [by the US government] have increased the dollar supply, and eventually the dollar will spill back to other countries causing it to weaken,” Boediono said.
Standard Chartered Indonesia also predicted that the rupiah would gradually strengthen to Rp 9,800 per US dollar by the end of the year. However, a Standard Chartered economist, Eric Sugandi, said he believed that increased confidence in the United States, due to recent moves by the US Federal Reserve, was causing a spike in confidence that might not be sustained.
“The Fed policy of buying US T-bills and mortgage securities is sparking positive sentiment with investors. They believe that the move will help the US economy to recover faster,” Eric said on Friday. “Investors are gaining the confidence to buy emerging market stocks, which are more risky yet offer higher yields.”
The yield on Indonesia’s 11.5 percent bond due September 2019 dropped 1.52 percentage points to 12.28 percent, based on Friday closing prices at the Inter Dealer Market Association. The figure indicates bond prices are increasing due to increasing demand.
The Jakarta Composite Index increased by 3.7 percent this week, from 1,312.092 on March 17 to 1,360.889 on March 20. Foreign investor net buys were increasing the gains.
“The main point is Indonesia enjoys positive fundamentals and growth expectations, and this is an advantage for us in attracting investors,” Eric said.
Eric said Indonesia’s stocks presently were underpriced compared to regional stock markets, with very low price-to-earning ratios, which could promise extremely high returns over the long-term.
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