By Arijit Ghosh and Lilian Karunungan
Oct. 29 (Bloomberg) -- The Indonesian rupiah may not sustain its gains after the government failed in its ``meager'' attempt to make the country's assets attractive to investors who see the currency as risky, economists said.
The government yesterday asked state companies to repatriate export proceeds and said it will scrap a levy on overseas palm oil sales to boost the rupiah. It also plans to buy bonds after the currency plunged as much as 29 percent in the past month.
These are ``meager solutions,'' said David E. Sumual, an economist with PT Bank Central Asia in Jakarta. The rupiah's gains are ``not due to the newly introduced policies but to the region's exchange rates reversing trend against the dollar.''
The rupiah swung between gains and losses and rose 0.9 percent to 10,800 against the dollar at 2:15 p.m. in Jakarta, easing from a 4.5 percent climb earlier on concern today's initial stock-market gains were not sustainable as the global economy weakens. Indonesia's benchmark index is down 60 percent and headed for its worst yearly performance on record.
The Jakarta Composite index was unchanged at 2:43 p.m. after rising as much as 3.2 percent earlier.
`` Much still depends on attitudes toward risk,'' said Dwyfor Evans, a currency strategist at State Street Global Markets in Hong Kong. ``We doubt whether the measures announced will necessarily outweigh further capital flight.''
Capital Outflows
Investors want the government to take more steps to convince them to buy the nation's assets. The government should follow Singapore in guaranteeing all bank deposits, said Andry Asmoro, an economist at PT Bahana Securities in Jakarta. Indonesia on Oct. 13 raised the ceiling for bank deposit guarantees 20 fold to 2 billion rupiah ($184,000).
``This would prevent possible capital outflow to countries that have implemented this policy,'' said Asmoro. ``Bank Indonesia must also be seen as actively intervening in the forex market, providing USD to imbue the confidence of the rupiah.''
A proposal to scrap the palm oil export levy by Indonesia, the world's biggest producer, is also unlikely to help, said Akmaluddin Hasibuan, chairman of Indonesian Palm Oil Association, known as Gapki.
Exporters pay tax on palm oil shipments using a base price and a tax rate set by the trade ministry every month. Palm oil futures in Malaysia have fallen 68 percent since reaching a record 4,486 ringgit ($1,255) a metric ton on March 4. Palm oil for January fell 2.3 percent to 1,425 ringgit a ton as of 11:42 a.m. in Kuala Lumpur.
`Bit Too Late'
``It's a bit too late as the price has tumbled,'' Hasibuan said in an interview today in Jakarta. ``It may help make our prices more competitive in the global market, but the main problem is drop in global demand.''
Overseas investors have been dumping emerging-market assets on concern they will be the worst affected amid the global credit crisis. The International Monetary Fund this month agreed to lend to Ukraine and Hungary as investors sold emerging market assets. Belarus and Pakistan are also seeking help. Indonesia was one of three countries in Asia to seek a bailout from the IMF during the Asian financial crisis a decade ago.
In 2005, the last time the rupiah plunged, Bank Indonesia raised its policy rate by 4.25 percentage points in the five months to December to 12.75 percent, and the government more than doubled fuel prices to help boost the currency from a four- year low in August that year.
Fuel Subsidies
Indonesia, where 35 million people live on less than 60 cents a day, raised fuel prices in May by more than a quarter, the first increase in three years, to cut subsidies after crude oil hit a record $135.09 a barrel. The 2008 fuel subsidy budget amounts to 180.3 trillion rupiah ($16.7 billion).
The government is now considering lowering subsidized fuel prices after crude oil futures fell to the lowest since May 2007, with the contract for December delivery dropping 49 cents to $62.73 a barrel in New York yesterday.
Bank Indonesia today said it plans to buy 4 trillion rupiah of bonds. Ten-year government debt rose after five days of declines.
The plan will have ``a positive impact on the bond price,'' said Henry Surya, who helps oversee the equivalent of $391 million as a fund manager and fixed-income analyst at PT Danareksa Investment Management in Jakarta.
The yield on the 9 percent note due in September 2018 dropped 72 basis points to 20.18 percent, according to midday prices at the Inter Dealer Market Association.
Weaker Currency
Overseas holdings of bonds have declined 12 percent this month to 93.06 trillion rupiah from a record in August.
Much depends on the ``global-market sentiment, and it's hard to imagine the rupiah not aligning with other regional currencies,'' said Gundy Cahyadi, an economist at IDEAglobal in Singapore. ``As long as there is pressure on Asian units, the rupiah will feel it too.''
The rupiah is declining even as the government said it expects the budget deficit to narrow to 1 percent of gross domestic product, from a previous forecast of 1.3 percent, on lower oil prices. Indonesia's economy is forecast by the government to expand between 5.5 percent and 6 percent next year.
Indonesia's central bank had $52.4 billion of reserves as of Oct. 15. The nation paid back its last loan from the IMF in 2005, four years ahead of schedule.
The Washington-based institution arranged a $25 billion package between 1997 and 2003 to help rescue Indonesia's banking system and rehabilitate the economy by restructuring private and government debt.
To contact the reporters on this story: Arijit Ghosh in Jakarta at aghosh@bloomberg.net; Lilian Karunungan in Singapore at lkarunungan@bloomberg.net.
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