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Rupiah starts to perk up

Retuters - December 2, 1998

Gde Anugrah Arka, Jakarta – Indonesia's ailing rupiah is out of intensive care and in the recovery ward – but anxious eyes are on the chart for any sign of a relapse.

The political turmoil and bloody unrest sweeping Indonesia has failed to dampen a steady rally that could see the rupiah breach the 7,000 barrier this month for the first time since January.

It is a long way from the dark days of mid-year, when it peaked above 15,000 against the U.S. dollar in local trade amid bloody unrest that killed more than 1,200. But the central bank is bullish, with Bank Indonesia governor Sjahril Sabirin talking up the currency at home and abroad. "There's room for it to strengthen a bit further, to a level a little bit below 7,000 or 6,500," he said in Hong Kong on Tuesday.

The currency, shrugging off political, ethnic and religious violence that has killed 30 people and disrupted business this month, is trading about 7,500 in Jakarta.

Analysts say the rally is being sustained by three key points – falling inflation, a safety net of international reserves and a steady stream of International Monetary Fund (IMF) aid money being changed from dollars into rupiah on the small local market. And all three supports look steady in the short to medium term, they said.

"The amount of aid dollars pledged by the IMF and other donors amounted to more than $43 billion – more than half of which has not been disbursed," said the Sigma Batara brokerage's research head, Fajar Sutandi.

"Because only around $1 billion is being disbursed monthly, the loans are still there to be disbursed next year, so the rupiah has the resources to breach 7,000 or even 6,500 provided it is achieved gradually to prevent excessive speculation."

Bank dealers say the central bank converting only $10 million a day carries substantial weight in what has become a very thin market in the wake of Indonesia's economic meltdown. Daily volume has slipped to $100 million from $2 billion before the economic crisis erupted in mid-1997.

While the dollar supply is likely to remain steady, demand will slide further as companies restructure their $80 billion worth of foreign debts and the government seeks to slow imports.

"Rising supply and falling demand for the dollar amid a very thin market are likely to help the currency strengthen further," said head of research at Panin Sekuritas Anton Karlam.

Analysts said the central bank was likely gradually to continue easing rupiah liquidity by lowering interest rates from a high of 70 percent in mid-August and 45 percent currently and expected the move to have little negative impact on the rupiah.

"In a few months ... if things stay at their current path, we should be able to reach 20, 30 percent or maybe lower than that," central bank's Sabirin said this week. Said Panin's Karlam: "Trillions of rupiah are not being absorbed by the the recent weekly auctions of one-month SBI paper."

Bankers would prefer put their funds in the next auctions despite lower rates rather than in the interbank money market. "This would help push rates lower at the next auctions."

Analysts said speculative dollar buying on the back of an easing in rupiah liquidity and a slow reform pace in the country's troubled banking sector was likely to be limited.

"They were already hit by the surprising rebound in the rupiah as a large number of them were believed to be long on dollar when it was still very high," said Karlam. "They are likely to be reluctant to repeat the mistake."