Indonesia's Rupiah May Drop on Commodities Slump, HSBC Says

By Bob Chen

Aug. 11 (Bloomberg) -- Indonesia's rupiah may drop in the remaining months of the year as rising demand for imported goods and sliding prices of commodities exported by the nation drive the current account to a deficit, according to HSBC Holdings Plc.

A weaker currency boosts the cost of imports, making it harder for the central bank to contain the fastest inflation in 22 months. Bank Indonesia on Aug. 5 raised its key interest rate to 9 percent, a fourth straight increase, and signaled that a stronger currency may be pursued to keep price gains in check.

The rupiah fell 0.2 percent to 9,185 per dollar as of 4:06 p.m. in Jakarta, after posting its first weekly decline since May in the five days ended Aug. 8. The currency will end the year at 9,150 per dollar, according to the median prediction of 21 analysts surveyed by Bloomberg. HSBC's forecast of 9,800, 6.3 percent below the current rate, is the weakest of the estimates.

``We believe strong forces will drive dollar-rupiah much higher eventually,'' Daniel Hui, a Hong Kong-based currency strategist at HSBC, said today in a report. A ``sharply deteriorating trade account'' may lead to Indonesia's first current-account deficit in three years, he added.

Indonesia's demand for imports is climbing as the economy improves. Gross domestic product probably rose more than 6 percent for a seventh straight quarter in the three months ended June 30, a Bloomberg survey of economists showed.

Palm Oil, Rubber

At the same time, exports are cooling as prices of palm oil, coal and rubber decline. The Reuters/Jeffries CRB Index of 19 commodities tumbled 10 percent in July, the most in any month since March 1980, and is down a further 7 percent this month. HSBC estimates that 60 percent of shipments from Indonesia, the world's biggest palm oil producer and second-largest rubber exporter, are commodities.

``Higher commodities prices have been a partial offset'' on the trade surplus, HSBC's Hui said. ``But as commodity prices start to decline, this will only exacerbate this trend'' toward a current-account deficit.

The rupiah has retreated 1.3 percent since reaching a five- month high of 9,056 per dollar on Aug. 6.

Bank Indonesia Deputy Governor Hartadi Sarwono said Aug. 8 that the benchmark interest rate may be raised as high as 9.5 percent, adding that the central bank will ensure the currency doesn't average stronger than 9,000 per dollar this year. The rupiah, the third-best performer among Asia's 10 most-traded currencies outside Japan in the past three months, averaged 9,239 per dollar in 2008.

To contact the reporter on this story: Bob Chen in Hong Kong at bchen45@bloomberg.net;