Exotic Currency Focus: Indonesia Rupiah Shrugs Off Violence

By JAY SOLOMON
AP-Dow Jones News Service

JAKARTA -- Indonesia is undergoing the most violent election campaign in its history and neighboring Thailand has been the target of devaluation rumors. But the rupiah seems to be weathering the storm.

Though the rate of the rupiah's depreciation has quickened this year, compared with 1996, the drop since the start of the election campaign on April 25 has been relatively modest.

The dollar currently trades around 2,440 rupiah, up a touch from 2,436 rupiah on April 25, the first day of campaigning in the parliamentary elections. But so far this year, the rupiah is down 3.1%, compared with a 3.2% depreciation during 1996 as a whole.

During the election campaign, Indonesia has seen sporadic flare-ups of violence, one of the worst being over the weekend, when at least 137 people were killed when arsonists set a shopping mall on fire during a pre-election riot in Banjarmasin, on the island of Borneo.

But analysts say the currency is likely to remain near the stronger end of the central bank's trading band unless there's a substantial escalation in the political violence related to Thursday's elections. The high yield on rupiah deposits will again draw investors to the Indonesian currency, they say.

'There is a price for everything, and we are nearing a price where (investment in) one-month and three-month (rupiah deposits) make a lot of sense,' said Bill Belchere, Merrill Lynch's head of Asian fixed-income research in Singapore.

That was the lesson learned in 1996, when worries about the health of President Suharto and serious rioting in Jakarta on July 27 caused only a brief dip in the rupiah, which was bolstered later in the year by yield-hungry investors.

Three-month rupiah deposits currently yield 14.25%, well above the equivalent 5.75% on three-month U.S. dollar deposits and still attractive even if some central bank induced rupiah depreciation is taken into account. Bank Indonesia has a policy of pushing down the rupiah by some 4-5% each year in order to stimulate non-oil exports.

Despite the rupiah's resilience so far - and the generally bullish forecasts - some analysts are worried about the effect on the rupiah of prolonged election violence.

William Keeling, chief representative in Jakarta for Dresdner Kleinwort Benson, says investors would be worried if election violence takes hold in the Indonesian capital, or if there are suggestions that the government is losing control of the situation.

Though the ruling Golkar party is assured of victory in Thursday's election, investors would also be concerned if opposition parties refuse to accept the result - which could become a flash-point for further violence, Keeling said.

With Thailand's recent problems fresh in the market's mind, continued unrest in Indonesia could attract the attentions of currency speculators.

'I see the same type of attack happening on the rupiah, as it has on the baht, if the rioting continues,' said Trisiladi Supriyanto, head of foreign exchange at Bank of America in Jakarta. 'Sooner or later if this continues we will be attacked by overseas speculators as confidence will disappear.'

And a sudden depreciation of the rupiah would quickly erode the attraction of Indonesia's high yields, says Angus Armstrong, regional economist at Deutsche Morgan Grenfell in Singapore.

Armstrong feels the rupiah may fall as much as 2% over the next three months. Political unrest, lower yields on central bank bills, depreciation worries and the spillover effects from Thailand will all create 'substantial risks for the downside,' Armstrong said.

Much of the rupiah's weakness earlier this year was due to lower deposit rates on central bank bills, or SBIs, as Bank Indonesia tried to guide the currency lower in line with its traditional depreciation policy, according to Christa Marti, an economist at Union Bank of Switzerland in Singapore.

Continuing rumors that the Bank of Thailand may move to devalue the baht also have hurt the rupiah, though less than many analysts expected.

But if the political scene calms quickly after Thursday's poll - as many expect - the rupiah will also bounce back, analysts say.

Investors will be drawn to the rupiah as they realize Indonesia's economic picture is much more stable than Thailand's, analysts say.

'We see short-term weakness over the next two weeks. but after the parliamentary elections end, the rupiah should strengthen due to its economic fundamentals,' said Daragh Maher, a regional economist at ING Baring Securities in Singapore.

That is likely to leave the rupiah around current levels of 2,440 rupiah per dollar in mid-June, Maher said. In the meantime, however, the central bank is seen adjusting its trading band for the rupiah in line with its depreciation policy - and this will again place the rupiah near the strong end of the band, where it stood for much of the last few months of 1996.

The current trading band is between 2,412 rupiah and 2,604 rupiah.

Economists expect support for the rupiah from Indonesia's low inflation, manageable current-account deficit and relatively stable banking situation - a more favorable fundamental picture than Thailand's.