According to the research, the rupiah may weaken in the spot terms against the US dollar to around 13,600 by the end of this year, weaker than the 13,500 in average exchange rate targeted by the government for 2016. 

BMI Research, a unit of Fitch Group, attributes the possible depreciation to global conditions, especially the yuan depreciation.

“Beijing has signaled that it is prepared to let the yuan slide to as low as CNY6.80/US dollars [coinciding with our forecast] by the end of the year. This will likely weigh on Asian currencies and the rupiah is unlikely to be spared,” it wrote in the report.

Domestic factors also pose a challenge, with Bank Indonesia (BI) expected to maintain its dovish stance.

BMI predicts the central bank will cut its benchmark interest rate by an additional 25 basis points to 6.25 percent in the coming months to support the economy.

After six months, the report says the rupiah may continue its gradual depreciatory trend against the greenback as a result of its widening income account deficit and higher inflation relative to the US.

Moreover, it says that risks to its rupiah view are skewed to the downside. It notes that the rupiah’s recent strength was in part due to hot money inflows as the country’s high-yield assets attract investors.

The rupiah has traditionally experienced selling pressures as well due to its high net international investment deficit at 48 percent of the gross domestic product (GDP).

Considering the country’s status as a commodity exporter, BMI estimates it is unlikely that BI will allow the rupiah to appreciate significantly as it will hurt exporters.

It puts its average rupiah estimate at 13,800 per US dollar for 2017. (tas)

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