Indonesian Rupiah Rises to 3-Year High on Economic Outlook, Interest Rates

Thursday, 29 July 2010

The Jakarta Globe

Indonesia’s rupiah rose to a three-year high as the country’s improving economy and relatively high interest rates attract funds from abroad. Bonds also gained.

The Jakarta Composite Index climbed to a record high after overseas investors pumped $414 million into local stocks this month through yesterday, lifting net purchases for the year to $1.27 billion. The government predicts the economy will expand 6 percent in the second half of 2010, after growth of 5.8 percent in the six months through June, and economists surveyed by Bloomberg estimate inflation reached a one-year high of 5.8 percent in July.

“Foreign investors are very positive toward Indonesia and they like the medium- to long-term growth story,” said Brian Jackson, a Hong Kong-based senior emerging-markets strategist at Royal Bank of Canada. “Inflation is picking up and we expect the central bank to raise rates by 50 basis points in the second half. The higher yield should further support the rupiah.”

The rupiah rose 0.3 percent to 8,973 per dollar as of 4:24 p.m. in Jakarta, the strongest level since July 2007. The currency has appreciated 4.7 percent this year, after strengthening 16 percent in 2009. Jackson said he expects the exchange rate to reach 8,800 by the end of this year.

Bank Indonesia in July left its benchmark interest rate at a record-low 6.5 percent for an 11th straight month. The central bank will raise the rate to 7 percent by year-end, according to the median forecast of economists surveyed by Bloomberg News. Benchmark rates in the U.S., the euro region and Japan are no more than 1 percent.

Government bonds rose, pushing the yield on the benchmark 10-year note down six basis points to a one-month low of 8.07 percent, according to midday prices at the Inter-Dealer Market Association. A basis point is 0.01 percentage point.

Indonesia’s local-currency notes have returned 15 percent this year, the biggest gain among 10 Asian local-currency debt indexes compiled by HSBC Holdings Plc. Foreigners’ holdings of the securities rose 57 percent this year through July 27 to a record 169.7 trillion rupiah ($18.9 billion), according to the finance ministry’s Web site.