B

ank Indonesia (BI) is forecasting a rebound in the rupiah exchange rate in the second half of 2016 as the domestic economy improves and external pressures subside.

BI deputy governor Perry Warjiyo said on Monday that the rupiah would initially stabilize in the first half before gaining ground in the second.

'€œPressures on the rupiah usually stem from inflation and current account deficit. Such pressures will ease because we already posted low inflation of 3.3 percent and a current account deficit of 2 percent last year,'€ he said.

According to Perry, inflation and current account will likely develop according to BI'€™s target estimates and further lift pressure off the economy in 2016.

BI has set this year'€™s estimate for inflation at 4.3 percent and its estimate for current account deficit at 2.5 percent.

On external pressures, the central bank predicts that they too will be small, thanks to China'€™s gradual stabilization measures in the money market.

'€œOur reading also shows that the market is expecting a two-time increase in the FFR [Federal Fund Rate] in March and June, totaling 50 basis points this year, as opposed to our expectation of four hikes totaling 100 basis points,'€ Perry added.

As the domestic economy improves and pressures recede, BI says that Indonesia will see capital inflows again in the equity market that will boost the performance of the rupiah, overturning last year'€™s outflows.

Financial volatility and dim economic prospects eventually led to a net sell of Rp 22.59 trillion (US$1.63 billion) in the stock market in 2015, according to data from the Indonesia Stock Exchange (IDX).

Meanwhile, BI'€™s data on the Jakarta Interbank Spot Dollar Rate (JISDOR) reveals that the rupiah slumped by an average of 9.8 percent per US dollar over 2015, from 12,440 to 13,795.

The same data shows that the rupiah has so far depreciated by around 0.3 percent per US dollar year-to-date. It stood at 13,844 against the greenback on Monday, 0.2 percent stronger than last Friday.

'€œWe will always maintain the rupiah'€™s stability, in line with its fundamentals,'€ Perry said, adding that the stability had opened up room for BI to loosen its tight monetary stance.

Separately, Standard Chartered chief economist Marios Maratheftis said that the rupiah turned out to be one of the most vulnerable currencies to the FFR hike, according to its study.

'€œSo we were not surprised at all to see the rupiah coming under pressure last year in anticipation of a Fed hike, but although the shocks were very significant when it came to the currency, the impact was not permanent.'€

He acknowledged that there was a possibility that BI would cut its key rate again if the rupiah stabilized, but the FFR would once again be a constraint.

'€œIf you'€™re a small, open economy, you cannot really deviate from the policies of the big economies. In economics, when it comes to interest rates, small, open economies are price takers, not price setters,'€ he added.

Unlike BI, Standard Chartered expects to see a modest depreciation in the rupiah, to 14,300 per US dollar, by midyear and to 14,500 per US dollar by year-end.

Meanwhile, Bank Central Asia (BCA) chief economist David Sumual said that rupiah strengthening would depend on a few things, including the implementation of the government'€™s economic policy packages.
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