Indonesian Rupiah Set to Fall 10% in Three Months, Goldman Says

By Lilian Karunungan

Dec. 3 (Bloomberg) -- The Indonesian rupiah will tumble 10 percent to its lowest level since 1998 in three months as the global financial slump spurs investors to sell more of the nation’s assets, according to Goldman Sachs Group Inc.

The rupiah has declined 24 percent since the start of September, Asia’s worst-performing currency, while funds overseas cut holdings of Indonesian bonds. Slowing growth and falling demand for commodity exports will send the rupiah lower though the decline won’t be as severe as during the Asian economic crisis a decade ago, wrote Hong Kong-based economist Enoch Fung in a report.

“We believe the weakening growth outlook and the continuation of de-leveraging due to global risk aversion will likely further pressure the Indonesian rupiah,” said Fung at Goldman Sachs, Wall Street’s most profitable firm.

The rupiah traded at 12,075 per dollar as of 2:35 p.m. in Jakarta, according to data compiled by Bloomberg. It will drop to 13,500 in three months, Fung said.

Indonesia’s currency reached 13,150 on Nov. 21, the weakest since August 1998, when the rupiah lost 32 percent that year to a record low of 16,950.

The $433 billion economy, South-east Asia’s largest, expanded 6.1 percent in the three months through September, the slowest pace in six quarters, a government report showed on Nov. 17. Goldman Sachs revised its 2009 growth forecast to 3 percent from 3.5 percent, less than the Indonesian government’s expectation of 4.5 percent.

Forward Contracts

Indonesia is the world’s biggest producer of palm oil and the second-largest maker of rubber.

“We do not believe weakness in the rupiah will take Indonesia back to the vicious cycle seen in 1998,” Fung wrote. “Corporate balance sheets and the financial system’s exposure to foreign-exchange risks are healthier this time around.”

Non-deliverable forwards contracts show traders are betting the rupiah will weaken to 12,968 in three months. Forwards are agreements in which assets are bought and sold at current prices for delivery at a later specified time and date.

The weakness in the rupiah will deter Bank Indonesia from reducing its benchmark interest rate too early to stimulate growth, according to the report.

The central bank raised borrowing costs six times this year to 9.5 percent to quell inflation. Policy makers will maintain the rate for a second month tomorrow, according to the median estimate of economists in a Bloomberg News survey.

‘Capital Flight’

“Given its small current-account surplus, it faces risks of capital flight and currency vulnerability if it were to embark on an aggressive rate-cutting cycle too early,” Fung said. He expects the central bank to lower the policy rate by 100 basis points by the middle of 2009.

The nation’s currency reserves dropped to $50.58 billion in October from $57.11 billion in late September as Bank Indonesia sold foreign exchange to help stem declines in the rupiah. The latest data are due this week.

Central banks intervene in currency markets by arranging purchases or sales of foreign exchange.

Foreign ownership of bonds slumped 19 percent to 86.42 trillion rupiah ($7.1 billion) in November from a peak of 106.66 trillion rupiah in August, data on the finance ministry’s Web site showed.

The Jakarta Composite Index of stocks has dropped 56 percent in 2008, headed for its biggest annual loss since at least 1984. Still, investors have bought more of the nation’s shares than they sold this year.

“We see the selling of rupiah-denominated assets by foreigners as the dominant driver behind the currency weakness,” Fung said.

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