Indonesia's Rupiah Will Slide 16% as Reserves Dry Up, RBS Says

By Lilian Karunungan

Oct. 15 (Bloomberg) -- Indonesia's rupiah will slide 16 percent within six months as foreign-exchange reserves approaching ``alarming levels'' force the central bank to rein in intervention, Royal Bank of Scotland Group Plc predicts.

The rupiah, which in September completed its biggest quarterly loss in three years, will tumble to 11,700 per dollar by the end of March, the U.K.'s fourth-largest bank by market value said in a research report sent to clients today. The country's reserves dropped $3.8 billion to $56.8 billion in the seven weeks through Sept. 12 as Bank Indonesia sold foreign exchange to support the local currency.



``The drawdown of reserves by BI won't be sustainable at some point,'' RBS economist Euben Paracuelles said in an interview, confirming the contents of a report he wrote. ``They either have to reduce their intervention or take it out altogether if reserves continue to fall very sharply.''

The rupiah traded at 9,783 per dollar as of 1:07 p.m. in Jakarta, little changed from 9,770 late yesterday, according to data compiled by Bloomberg. The currency weakened beyond 10,000 for the first time in three years on Oct. 10 and last traded at 11,700 in 2001.

Non-deliverable forwards contracts show traders are betting the rupiah will weaken 8 percent to 10,630 against the greenback in six months. Forwards are agreements in which assets are bought and sold at current prices for delivery at a later specified time and date.

Bank Indonesia will ``intervene'' to boost the rupiah if required as it has enough currency reserves, Senior Deputy Governor Miranda Goeltom said Oct. 5. Central banks can support their currencies by arranging sales of foreign exchange.

`Vulnerability Concerns'

The reserves, which can cover 4 1/2 months worth of imports, are now near ``historically low levels,'' Paracuelles wrote in the report. ``This could fuel external vulnerability concerns and render future draw-downs in reserves to defend the rupiah increasingly counterproductive.''

The rupiah is weakening as a global credit crisis prompts global funds to favor safer bets than emerging-market assets. Foreign ownership of government bonds fell 5.6 percent in the first 10 days of this month to 99.54 trillion rupiah ($10 billion), the finance ministry said on its Web site on Oct. 13. The Jakarta Composite stock index has slumped 16 percent since the end of September.

``Bouts of global risk aversion have and may continue to trigger large-scale capital outflows due to large foreign participation in the Indonesian bond and stock markets,'' the report said.

Indonesia's currency may also come under pressure as the central bank, which raised its benchmark interest rate six times this year to curb inflation, considers lowering borrowing costs in 2009 to sustain economic growth, Paracuelles said.

``Policy easing may also be on the cards next year, removing a key support for the rupiah,'' Paracuelles wrote.

Southeast Asia's largest economy may expand between 5.5 percent and 6.1 percent next year, the Ministry of Finance said in a proposal submitted to parliament on Oct. 12. It previously forecast 6.3 percent growth.

To contact the reporter on this story: Lilian Karunungan in Singapore at at lkarunungan@bloomberg.net.