Rupiah stronger in 2nd half: BI

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The rupiah will likely be “slightly stronger” in the second half of this year compared with the first six months, when the currency’s performance was the second weakest in the region, Indonesia’s central bank chief says.

Bank Indonesia (BI) governor Darmin Nasution said last week that the rupiah would average at between Rp 9,100 and Rp 9,300 per US dollar through this year, as the eurozone debt crisis may soften following authorities’ actions to calm the situation.

The nation’s currency has averaged Rp 9,171 per US dollar during the January-June period of this year, after averaging Rp 8,768 throughout last year.

“We estimate that pressures on the rupiah will tend to ease in the second half of 2012. Efforts to improve [conditions] in Europe have started to show,” Darmin told a hearing session with the House of Representatives recently. “Currency rates will not be this weak, but will be slightly stronger.”

The rupiah traded at Rp 9,405 per US dollar as of 4 p.m. in Jakarta on Friday, according to local banks’ prices compiled by Bloomberg, having weakened about 3.8 percent so far this year. The currency touched its weakest level since October 2009 of above Rp 9,600 in May, but reversed losses recently as authorities in the debt-stricken eurozone have taken actions to tackle the ongoing crisis.

“Anything that calms the financial market is good for Indonesia. To the extent that this action by the ECB [European Central Bank] has calmed international investors. [They] feel more comfortable in holding Indonesian bonds,” Milan Zavadjil, senior resident representatives of the International Monetary Fund (IMF) in Indonesia said.

The ECB cut its reference rate to a record low on Thursday to spur growth, and European leaders have also agreed to relax conditions on bailout funds for Spanish banks and possible aid for Italy at a two-day summit that concluded on June 29 in Brussels.

While a permanent solution for the eurozone debt crisis has yet to be found, global financial market, including in Indonesia, remains prone to high level volatility, economists have said.

Exchange rate flexibility, however, combined with interventions to smooth temporary sharp mismatches in supply and demand of foreign exchange, is key to helping buffer Indonesia’s economy from shocks, according to the IMF.

“It is important that the rupiah be allowed to adjust depending on how the global factors pan out, how the domestic economy plays. So, it depends a lot on what happens externally, but also domestically. It is important to make sure that the rupiah is flexible, and by definition that means it could change either direction,” Sanjaya Panth, division chief in the Asia Pacific department of IMF, said.

Indonesia’s central bank intervenes by buying rupiah and government bonds using the nation’s foreign exchange reserves stored at the BI to calm selling pressures on the currency. The reserve position was at US$106.5 billion as per June.

“BI’s reserves are adequate. So if you have a very temporary shock in demand and supply, it is appropriate for BI to smoothen that out, as they have been doing in recent weeks,” said Panth, considering the central bank’s move to have “instilled confidence” and “led the market to become a little more stable recently”.