T

he rupiah has appreciated too fast, largely thanks to robust foreign inflows, threatening efforts to push down the current-account deficit, says Bank Indonesia (BI).

'€œA continual strengthening of the currency isn'€™t necessarily a good thing,'€ BI Senior Deputy Governor Mirza Adityaswara said recently.

'€œIf other currencies are depreciating while ours alone is strengthening, when our fundamentals have not significantly improved, [the rupiah level] may not be good for our exports and imports,'€ he explained.

The rupiah appreciated 1.5 percent in one day to touch 11,886 per US dollar on Friday, according to the Jakarta Interbank Spot Dollar Rate (JISDOR), after Indonesia'€™s faster-than-expected improvement in its current account attracted greater foreign inflows.

Investors rushed to buy rupiah assets upon hearing the news that the deficit in the current account '€” the broadest measurement in international trade that is an indicator of economic health '€” narrowed to US$4 billion, or 1.98 percent of gross domestic product (GDP) in the fourth quarter last year, from its historic high of $9.8 billion in the second quarter.

The rupiah, which has strengthened by 2.9 percent year-to-date, is now the best performer among emerging-market currencies, reversing its misfortune after it depreciated by 26 percent last year '€” the world'€™s worst performer in 2013.

This year, the rupiah is set for a '€œremarkable rally'€, and it could appreciate to as strong as 10,250 per dollar, France-based Société Générale has predicted. Privately owned Bank Danamon forecast the currency would strengthen to 11,058 by the end of this year, while UK-based Lloyds Bank said it would trade at 11,400.

However, Canada-based Manulife Asset Management argued that BI may soon take action against the overly-strong rupiah to maintain it at a level of between 12,000 and 12,500 per dollar.

'€œIf the rupiah strengthens too drastically, there could be a risk of upswing in the current-account deficit, as a stronger currency could elevate imports,'€ said Manulife Asset Management Indonesia'€™s chief investment officer, Alvin Pattisahusiwa.

BI has deliberately weakened the currency over the past few months to rein in imports and push up
exports.

The unusual strategy was deemed a blockbuster success, thanks to exports exceeding imports for three consecutive months and leading to a widening trade surplus, which reached $1.5 billion for the month of December. This figure was more than twice that predicted by economists.

The current strong foreign inflows offered BI an opportunity to absorb dollars from the market, a move that would weaken the rupiah and replenish the central bank'€™s foreign exchange (forex) reserves, said Helmi Arman, a Jakarta-based economist with Citigroup.

Analysts have said BI might need to beef up forex reserves to prepare for future risks of capital outflows, due to the pullback of US monetary stimulus this year. By the end of January, BI'€™s forex reserves stood at $100.6 billion, enough to finance 5.6 months of imports and foreign debt payments.

Pressure on BI'€™s forex reserves may intensify in coming months, as at least $3 billion from Indonesia'€™s recent sovereign issuance would be used to refinance debts maturing in April, according to Philip McNicholas, an economist with BNP Paribas in Hong Kong.

With all other flows assumed to be balanced, repayment of that debt might cause forex reserves to fall by the same amount during the month, he said.

'€œUnfortunately, the end-April repayment occurs at a time when Indonesia'€™s current account is seasonally weak,'€ he cautioned. '€œThe second quarter typically sees a surge in income payments to foreign investors that heighten onshore dollar demand and drag on the current account.'€