Rupiah nears three-year low on outflow of foreign funds

INDONESIA - The Indonesian currency continued to face pressure on Tuesday, falling near a three-year low, due to a surge in demand for US dollars for year-end payments and an increase in foreign fund outflows from the local equity market.

The rupiah weakened 0.4 per cent to 9,665 per dollar as of 5:22 p.m. on Tuesday, prices from local banks compiled by Bloomberg showed.

The currency touched 9,733 on Monday, its lowest level in three years.

Currency analysts said the fall in the Indonesian currency was caused by year-end dollar purchases and the increase in foreign fund outflows from the country's stock market.

Overseas investors sold US$160 million(S$193.70 million) more in local stocks than they bought this month through Monday, following net sales of US$319 million in November, according Bloomberg.

The Indonesian Stock Exchange's (IDX) Composite Index fell 0.4 per cent on Tuesday.

"There's nothing to worry about. Dollar demand is always high as the year's end approaches," Bank Indonesia (BI) spokesman Difi Johansyah said in Jakarta on Tuesday.

He said the demand for dollars was usually higher before the end of the year as foreign companies had an obligation to transfer part of their profits to their parent companies overseas. "These companies have to buy dollars for repatriation," he added.

Other analysts attributed the rupiah's fall to rising concerns about the further widening of the country's current account deficit. In the third quarter of this year, the deficit touched US$5.3 billion, or 2.4 per cent of the nation's gross domestic product (GDP), a slight recovery from the second quarter figure of US$7.7 billion (3.5 per cent of GDP).

"BI expects FDI [foreign direct investment] and other foreign fund inflows to offset the current account deficit. We disagree," wrote Prakriti Sofat and Joey Chew, analysts with Barclays Capital, in a research note distributed on Tuesday.

They were referring to the fact that BI expected the deficit to narrow to 2.2 per cent of GDP by the end of this year.

According to Barclays, the current account deficit would grow at a "sizeable" 2.5 per cent of GDP this year due to inadequate FDI and portfolio flows, before improving slightly to 2.1 per cent in 2013.

They forecast the rupiah would average around 9,900 in the next 12 months.

Concerns about a widening current account deficit were "exaggerated", BI Governor Darmin Nasution said, adding that the weakening rupiah was a cyclical trend caused by the increasing demand for dollars before the new year.

The central bank held its benchmark rate unchanged on Tuesday at 5.75 per cent for the 10th consecutive month, in line with analysts' expectations.

Concerns over the further depreciation of the rupiah in the long term also emanate from the government's plan to considerably reduce the amount of foreign debt next year.

The President's National Economic Committee (KEN) has warned that Indonesia would need to convert Rp 19.4 trillion (S$2.44 billion) into US dollars to fulfil such an objective, a situation that could trigger "disturbances in the currency market".

In response, the Finance Ministry's interim head of fiscal policy, Bambang Brodjonegoro, said, "We will cooperate with BI to maintain the dollar supply in the market [because] if we splash Rp 19 trillion on dollars at one time, then the supply may not be enough."