Indonesia's Rupiah Is `Undervalued,' Treasurers Say

By Lilian Karunungan

Nov. 21 (Bloomberg) -- Indonesia's rupiah, which dropped 22 percent in the past month to a decade low, is ``undervalued'' as Southeast Asia's largest economy will weather a global economic slump, said treasurers at the country's biggest banks.

The rupiah may rebound 25 percent through next year as the nation's yield advantage attracts investors, according to PT Bank Central Asia and PT Bank Rakyat Indonesia. The currency is the biggest loser in the past month among Asia's 10 most-active currencies outside Japan as overseas funds shun emerging-market assets amid the global financial crisis.

``As far as the rupiah is concerned, we are close to the bottom,'' said Branko Windoe, head of treasury at Bank Central Asia, Indonesia's largest by market value. ``Indonesia is the largest economy in Southeast Asia simply because of the number of people. That will make the economy resistant to the global recession.''

Indonesia's currency fell as low as 13,150 against the dollar, the weakest since August 1998, before trading at 12,530 as of 2:22 p.m. in Jakarta, compared with 12,300 yesterday, according to data compiled by Bloomberg. Asian currencies and stocks tumbled this month after the U.S., European and Japanese economies shrank, tipping the world into a recession and damping demand for exports the region relies on to drive growth.

The $433 billion economy has a population of 243 million, Asia's third largest behind India and China. Domestic consumption contributes nearly 60 percent to the economy, while exports comprise 29 percent. Indonesia is the world's biggest producer of palm oil and the second-largest maker of rubber.

Resilient Growth

The economy expanded 6.1 percent in the third quarter, the slowest in six quarters, a government report showed on Nov. 17. That exceeded the median 5.9 percent forecast in a Bloomberg News survey. Japan's economy, the world's second largest, and Singapore, an Asian financial hub, have already fallen into recession. Indonesia's economic growth may ease to as low as 5 percent next year as the world tilts toward a recession, Finance Minister Sri Mulyani Indrawati said on Nov. 9.

The rupiah ``should be around 10,200 to 10,500,'' said Benny Santoso, treasury manager at Bank Rakyat, the nation's second-biggest bank. ``Hopefully for the first half of 2009, everything should be settled down. Growth has been better than expected.''

The currency may strengthen to 10,000 if the U.S. economy steadies, reviving risk appetite, Windoe said in an interview in Jakarta.

The rupiah ``is like rubber when you pull it,'' he said. ``It's already been pulled. It just needs a trigger for it to come back and once it does it's going to be very, very fast.''

Higher Yields

Non-deliverable forwards contracts show traders are betting the rupiah will weaken about 19 percent to 15,500 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.

Indonesia will attract investors seeking higher yields once risk-takers reappear, treasurers said. Ten-year government bonds yield 13.9 percentage points more than similar-dated U.S. Treasuries. The spread was at 17.3 percentage points on Oct. 27, the highest since at least 2003.

Foreign ownership of bonds declined 16 percent to 89.99 trillion rupiah ($7 billion) as of Nov. 18 from a peak of 106.66 trillion rupiah in August, the finance ministry said on its Web site.

The rupiah ``could reach 10,000 or below as soon as we see a resumption of carry trades and a decline in risk aversion,'' Windoe said. The currency will be the ``main investment destination simply because of the high interest-rate differential at this point in time. The good thing for the rupiah is foreign direct investments are coming.''

Bargains

Foreign investors have started to hunt for bargains in Indonesian companies. U.S. buyout firm TPG and San Miguel Corp., the Philippines' largest food and drinks company, have both expressed interest in buying into PT Bumi Resources, Asia's biggest exporter of power-station coal.

The rupiah also may gain after a technical indicator showed the currency may reverse its losses. The 14-day relative strength index reached 88.6 today. A level at or above 70 signals that the currency is poised to gain. In technical analysis, investors and analysts study charts of trading patterns and prices to forecast changes in a security, commodity, currency or index.

Support Level

``We are already trading at the support level,'' Windoe said. ``The demand for dollars and the intensity of the demand is also decreasing because it's getting to be very expensive.''

Economists at PT Bank Danamon Indonesia, controlled by Singapore's Temasek Holdings Pte and Deutsche Bank AG, said the rupiah may have a difficult time going back to 10,500 after the nation's currency reserves dropped to $50.58 billion in October from $57.11 billion in late September when Bank Indonesia sold foreign exchange to help stem declines in the rupiah.

``A retreat back to below 10,500 is very unlikely in the next several quarters given that reserves have fallen very significantly,'' said Helmi Arman, an economist at Bank Danamon in Jakarta.

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