Less fragile Indonesia slows drop in rupiah

JAKARTA/KUALA LUMPUR: While no one’s expecting a big turnaround in the rupiah, analysts see its decline slowing as a narrowing current-account deficit and relatively healthy reserves offer Indonesia some shelter from China’s slowdown and higher US interest rates.

The rupiah fell 9% to 14,651 a dollar last quarter, the most in two years, prices from local banks show. That compares with an 8.3% drop in an index of 20 developing nation currencies. ABN Amro NV, the most accurate forecaster of Asian currencies in Bloomberg rankings, predicts a 2.3% loss to 15,000 this quarter and Barclays Plc sees a drop of 1%.

Indonesia’s current-account shortfall has more than halved since 2013 when the rupiah lost a fifth of its value after the Federal Reserve signalled it would wind down a massive stimulus programme. Bank Indonesia’s US$105 billion stockpile of foreign- exchange reserves, while declining, is more than 7% bigger than it was in the middle of that year.

“It will be a less rapid decline in the months ahead,” said Mitul Kotecha, head of foreign-exchange and rates strategy for Asia at Barclays in Singapore. “The macroeconomic fundamentals don’t warrant this sort of decline in the currency.”

Indonesia is in a “quite comfortable” position with its foreignexchange stockpile, Mr Kotecha said. The reserves shrank 5.8% this year, less than an 18% drop in neighbouring Malaysia.

Southeast Asia’s largest economy recorded a $4.5 billion deficit in the broadest measure of trade in the second quarter, less than $9.6 billion a year earlier and a record $10.1 billion shortfall in the three months through June 2013. Barclays forecasts a full-year currentaccount deficit of 2.4% of gross domestic product in 2015, down from 3.1% last year.

The decline of the rupiah decline last quarter was the worst performance in Asia after the Malaysian ringgit’s 14% loss. It was less than drops in Turkey’s lira, South Africa’s rand, Russia’s rouble, Colombia’s peso and Brazil’s real. A gauge of Asian currencies fell 4.1% over the period. The rupiah has dropped another 0.3% in the first two days of October.

“The rupiah is still likely to underperform other Asian currencies, but not to as large an extent as we’ve seen recently,” said Roy Teo, a senior foreign-exchange strategist at ABN Amro Bank NV in Singapore. “In the event that the rupiah continues to weaken substantially, we think Bank Indonesia will raise interest rates to defend the currency.”

The monetary authority has held its policy rate at 7.5% since February and 20 of 25 analysts surveyed by Bloomberg see it remaining on hold for the rest of the year, while five expect a reduction.