Rupiah may fall to Rp 9,500 against U.S. dollar by year's end

Aditya Suharmoko ,  The Jakarta Post ,  Jakarta   |  Wed, 04/23/2008 1:07 AM  |  Headlines

The rupiah is predicted to depreciate to Rp 9,500 per dollar by the end of the year on the lack of positive sentiment at home and rising global oil prices, a Bank Mandiri study says.

Mandiri chief economist Martin Panggabean said in Jakarta Tuesday that the currency, which currently hovers at around Rp 9,180 to 9,240 per dollar, might weaken by 1.39 percent by the end of December as the high oil prices meant the country's dollar demand for oil import would also be high.

On Tuesday, the rupiah closed at Rp 9,190 against the dollar, unchanged from the previous day. At the start of the year, the rupiah was at Rp 9,370 against the U.S. greenback.

"There is a large potential for rupiah depreciation," Martin said.

On-year inflation reached 8.17 percent in the first quarter of 2008, as against the government's full-year expectation of 6.50 percent.

Mandiri predicted full-year inflation of 8.33 percent, a rise from its previous estimate of 7.04 percent.

World crude oil rose to a record high of US$118.05 per barrel in New York.

Martin said high inflation and rupiah depreciation would result in gross domestic product (GDP) growth rising by only 5.9 percent to 6.1 percent this year.

The World Bank and the Asian Development Bank (ADB) have predicted the country's economy will grow by about 6 percent this year, lower than the 6.4 percent forecast from the government.

High inflation discourages the central bank from further cutting its benchmark interest rate, effectively increasing the cost of borrowing and dampening economic activities.

In assuming global oil prices of $105 per barrel, inflation close to 10 percent and the rupiah at Rp 9,500 against the dollar, the study said GDP growth would reach 5.91 percent.

If oil prices went to $95 per barrel, inflation to 8.5 percent and the rupiah to Rp 9,300 against the dollar, the economy would grow by 6.11 percent, said the study.

To curb inflation, Martin said the central bank needed to raise its rate at least by 50 basis points. Bank Indonesia (BI) has held its rate at 8 percent since December 2007.

"By increasing its rate, BI can shorten the inflation period. And, in 2009, BI could lower its rate again to stimulate the growth of the real sector," he said.

"It is crucial to control inflation to maintain people's purchasing power," said Martin. Strong purchasing power aids consumption, the backbone of the country's economy.

For industries, the study also shows that with the current inflation -- driven by the rise in oil and commodity prices -- industries engaging in commodity sectors are the most affected.

"Food and tobacco industries need to be careful of the high inflation," said Martin.

He also said banks would be reluctant to disburse consumer loans considering a high inflation rate raises the risk of bad loans.

Last year, bank lending grew by 25.5 percent from Rp 832.9 trillion in 2006 to Rp 1,045.7 trillion in 2007.

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