Posted 29 August 2005 @ 14:13
Updated 29 August 2005 @ 14:17
JAKARTA, 29 August 2005 - The rupiah lost nearly 5 pct today, falling past 10,800 per dollar at one point as the market continued to lose confidence in the capability of both Bank Indonesia and the government to defend the local unit, analysts said. They said today's fresh oil price spike was what triggered renewed selling pressure on the rupiah.
However, they added that its depreciation has been accelerated by apparent inaction from the authorities amid serious fiscal risks faced by Indonesia from the current high oil prices. The rupiah ended at 10,750/10,800 to the dollar, off a low of 10,835/10,885, and compared to Friday's close of 10,395/10,400. Analysts said they were caught by surprise when the rupiah broke the 10,500 per usd level so easily early in the day.
'I think that after the rupiah breached 10,000 it became a matter of market confidence,' said Nizam Idris, currency analyst with Singapore-based IDEAglobal.com. 'At the end of last week, we were just thinking that the rupiah could fall to 10,500 this week. We thought the government and the central bank would take action and try to defend it. 'But now it looks quite difficult (to do so) given that the rupiah has fallen sharply in such a short span of time. It may continue to be under pressure,' said Euben Paracuelles, economist with Singapore-based DBS Vickers.
'I am afraid that the longer the market waits, the lesser the confidence of investors will be. That would hurt the rupiah even more,' said DBS' Paracuelles. IDEA's Idris said today's rupiah freefall means that serious effort needs to be taken to address each problem and regain investor confidence. He said apart from worries over the impact of high oil prices on the state budget, the market situation has been damaged further by speculation that state oil firm Pertamina may have breached the rule that it should buy dollars only from Bank Indonesia.
'There has been talk that Pertamina goes straight to the market' for its dollar requirements, he said, adding that under the current situation it would be too sensitive an issue if Pertamina is found to resort to such practice. Such speculation persists even after State Enterprises Minister Sugiharto assured last week that Pertamina did not buy its dollar requirements from the open market during the time when the rupiah tumbled.
He said Pertamina has been buying US currency in the amount of 1.5-1.8 bln usd per month over the past three months, but has followed the guideline that the purchases should be done through Bank Indonesia. Idris said he believes that fundamentally, Indonesia remains strong and that President Yudhoyono has delivered some economic and fiscal improvements so that the rupiah ought to get stronger.
'I think if the rupiah does touch 11,000 (per usd), there would be (dollar) sellers. I would not also be surprised if BI issues certain measures out soon,' he said. But at this stage, market confidence needs to be restored first. DBS' Paracuelles said he is inclined to agree that investors dumped the rupiah because of the oil price spike and therefore any concrete measures that would address the impact of oil prices on the market and the economy could help lift confidence.
'As inflation is heading towards 8 pct in August, BI must raise interest rates further. And it has to be complemented by the removal of the fuel subsidy,' he said. 'And I think it is not a question of political will but how to find the right balance,' he added. He said there is a risk that raising fuel prices twice in a year would trigger social unrest, which could also trigger a reversal in investor confidence.
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