T

he rupiah will face intense pressure if the government cannot resolve escalating energy subsidy costs and a widening oil trade deficit, economists have warned.

In a report titled “Indonesia in Focus: Testing Thresholds” that was released on Tuesday, economists from Bank of America Merrill Lynch said that the rupiah might trade above 10,000 per US dollar in the short run if the government fails to resolve the problems.
(Source: Bloomberg)
The report said that BI would have problems in defending the rupiah and might breach the psychological barrier of US$100 billion in foreign exchange (forex) reserves. In February, BI’s forex reserves hit a two-year low of $105.2 billion, equivalent of 5.7 months of imports and short-term foreign debts.

With stronger pressure on the rupiah expected, the psychological threshold would “likely be tested soon”, according to Bank of America Merrill Lynch economist Hak Bin Chua. “If BI continues to intervene heavily, the $100 billion reserves threshold will likely be breached in April or May,” he said. BI’s forex reserves were down $7.6 billion in the first two months of the year as the central bank stepped up intervention to defend the rupiah, the worst-performing currency in the region in 2012. The currency traded at 9,739 per US dollar on Tuesday, compared with 9,740 a day earlier, according to Bloomberg.

This week, the Central Statistics Agency (BPS) reported that Indonesia posted a $1.1 billion deficit in its oil and gas trade in February, taking the full-month trade deficit to $327 million.

The deficit was attributed mainly to fuel subsidies, a politically sensitive issue in Indonesia, whose citizens have previously launched violent protests against actual or proposed fuel price hikes.

The government, which has refrained from raising fuel prices to maintain political stability ahead of elections in 2014, has announced plans to limit subsidized fuel consumption.

Among the options said to be under consideration by President Susilo Bambang Yudhoyono are forbidding private vehicles from using subsidized fuel, as well as developing technology to limit consumption.

Meanwhile, Citibank Indonesia economist Helmi Arman said that there might be “another round of turbulence” for the rupiah given that the oil-trade balance might continue to deteriorate, as a recovery for the nation’s commodity exports was nowhere in sight.

“We revised down our 6 to 12 month rupiah forecast of 9,900 per US dollar last month to account for this; but upside risk remains if the terms of trade continue to deteriorate,” he wrote in a research note released this week.

Bank Danamon economists Dian Ayu Yustina, Anton Hendranata and Anton H. Gunawan agreed that the trade balance figure remained a concern as it slipped deeper into negative territory.

The economists said that they were concerned that potential pressure on the oil and gas trade balance could put additional pressure on the nation’s current accounts, which would in turn lead to negative sentiment for the rupiah.

They estimated that in the short-term, the rupiah would hover between Rp 9,600 and Rp 9,700 per US dollar, but remained upbeat that the rupiah would strengthen to Rp 9,502 by the end of the year.