A Dow Jones Newswires Column
[By Rosalind Mathieson ]
SINGAPORE (Dow Jones)--Activity in the Indonesian government bond market is signaling more weakness ahead for the rupiah, but this doesn't portend a repeat of the 2005 currency dive.
In the past week, rupiah-denominated bonds have slid as the market has begun pricing in the view that the central bank is at - or near - the end of its easing cycle.
The average yield on government bonds rose to 8.79% as of Thursday from 8.45% Nov. 8; the government's outstanding rupiah bonds total IDR461 trillion, with maturities ranging from one to 30 years. Foreigners held around 18% of those bonds as of October.
The rise in yields has largely been due to the central bank's recent decision to stand pat on interest rates.
Several analysts expect further yield rises, especially with inflation potentially becoming a problem on still-high global crude oil prices.
ING on Friday raised its end-year forecast for the 10-year yield to 10.0% from 9.0% earlier, and its end-2008 call to 9.0% from 8.50%.
The selloff in the bond market has led to outflows from Indonesia, exacerbated by the rupiah's status as a regional carry-trade favorite - one of the currencies which has benefited from the sell yen/buy high-yielders play. Indonesia's one-month policy rate is 8.25%, vs the Bank of Japan's policy rate at 0.5%.
With carry trades being periodically unwound amid a global wave of risk aversion, it's no surprise to find the rupiah under the hammer, leading the declines among Asian currencies.
Given the high level of oil prices, and with Indonesia a net oil importer, authorities are very keen to avoid the perception this is a repeat of 2005, when an oil price surge led to a mini-rout in the rupiah.
The central bank intervened Friday, selling dollars when the rupiah was around two-month lows, with Deputy Gov. Hartadi Sarwono telling Dow Jones Newswires that Bank Indonesia was "not happy" with the rupiah's weakness and wanted to stabilize the currency "with a strengthening tendency."
Another deputy governor, Aslim Tadjuddin, forecast the dollar to fall back to IDR9,000, but without giving a timeframe. The dollar ended Friday at IDR9,330.
More near-term weakness in the rupiah is likely, especially if bonds (and stocks) continue to weaken. According to Westpac, "The rupiah looks like trouble."
But is it really?
Many analysts expect the central bank to stand pat again on rates at its next meeting Dec. 6 in a bid to stop the currency decline.
Such a move would also risk a fresh spike in bond yields, but the rises seem most likely to become more gradual as markets are adjusting already to the idea of rates on hold.
Consider too oil prices. If the U.S. economy slows, demand for oil will slow, taking some of the pressure off countries like Indonesia.
If the central bank does come to an end on rate cuts, is that really a bad thing? Fundamentally the economy is in much better shape than five or 10 years ago, and its current account is much more able to cope with offshore headwinds.
Data last week showed the economy in the third quarter grew 6.50% on year, up from a revised 6.34% in the previous quarter. On quarter, the economy expanded 3.90%, up from 2.41% in the previous period.
The expansion was higher than the average forecast in a Dow Jones Newswires poll for 6.15% growth on year and 3.54% on quarter. It was also higher than the government's growth target of 6.3% for this year.
Demand is being driven by investment flows, exports and private consumption, while analysts expect a pickup in government spending. Also, the better-positioned current account leaves Jakarta somewhat more comfortably placed to deal with high oil prices.
While foreign outflows have come from the stock market, as well as bonds (daily data through to last Wednesday show foreign investors were net sellers for five straight days and seven of the past eight, says Brown Brothers Harriman), the Jakarta share index is still up about 47% for the year and should be helped going forward by the solid economic outlook.
That's not to say the rupiah is in for some radical gains anytime soon.
But it should be able to share in some of the regional rise in currencies, which are being led by faster appreciation in the Chinese yuan, and amid signs of greater tolerance of higher currencies among key central banks.
-By Rosalind Mathieson, Dow Jones Newswires; +65-6415-4141, rosalind.mathieson@dowjones.com
(Rosalind Mathieson is the Managing Editor for Dow Jones Markets News in Asia. She has 13 years of experience as a political and financial reporter and editor, having worked previously at Australian Associated Press in Sydney and Canberra.)
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(END) Dow Jones Newswires
November 18, 2007 19:44 ET (00:44 GMT)
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