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'Undervalued' rupiah may attract investors
The rupiah is among the lowest-valued currencies in Asia, but Indonesian assets will remain attractive as a low valuation means additional returns on investment from currency gains, say analysts
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The rupiah is among the lowest-valued currencies in Asia, but Indonesian assets will remain attractive as a low valuation means additional returns on investment from currency gains, say analysts.
The rupiah has the cheapest valuation among nine major Asian currencies rated, based on their real effective exchange rate (REER), according to data compiled by strategists from the ANZ Bank released on Sept. 23.
Indonesian bonds were also rated as the cheapest, while its equities traded on the Jakarta Composite Index (JCI) are the region's third most-expensive-based on their price-to-earnings ratio.
Overall, the ANZ Bank ranked assets in Indonesia as the second-cheapest in the region after China, based on their real valuations, with the Philippines and Thailand rated as the most expensive.
'In a rising interest rate environment, investors will become increasingly focused on valuations,' noted Khoon Goh, a Singapore-based senior currency strategist with the ANZ Bank.
The US Federal Reserve is expected to increase interest rates next year and countries that have expensive asset prices, such as Thailand and the Philippines, will be at a higher risk of outflows, according to him.
'China, Indonesia and Singapore look to have the cheapest relative asset valuation in the region, which could help mitigate any sell-off to some extent,' stated Khoon.
These expected inflows would help Bank Indonesia (BI) in anticipating tighter global liquidity that could come next year.
The rupiah was trading at 12,007 per US dollar by the end of Friday, according to the Jakarta Interbank Spot Dollar Rate (JISDOR). The currency has weakened 2.4 percent this month.
The rupiah was 'undervalued' when it was traded at 12,000 per US dollar, according to BI Senior Deputy Governor Mirza Adityaswara, who pointed out the 11,600-11,900 per dollar range as more reflective of the currency's fair value.
'Our compass long-run model estimates the rupiah to be about 4 percent undervalued,' Chua Hak Bin, an economist with Bank of America Merrill Lynch, said recently in an email interview.
The US-based investment bank forecast the rupiah would strengthen to 11,800 per dollar by the end of
this year.
The rupiah suffered because Indonesia's central bank was seen as indecisive in tackling external imbalances as the country's current-account deficit (CAD) improved only marginally, according to Huw McKay, a Sydney-based economist with Westpac Bank.
That compares to the Indian rupee's strengthening after the country's central bank raised rates aggressively following a sharp narrowing of its CAD, he noted in an email interview.
'BI was less decisive and the CAD suffered again once the ore export ban hit resource shipments,' said McKay, who described the Indonesian rupiah as the most 'stagflationary' currency among all 11 Asian currencies that he had surveyed.
In the medium term, further bullish sentiment for the rupiah may come from the potential adjustment in fuel prices, which is expected to reduce oil imports and narrow the current-account deficit, analysts have said.
