Rupiah still offers high returns but risk grows
INVESTORS willing to keep a close eye on political developments in Indonesia and act quickly if things turn ugly can earn a nice margin on rupiah-based investments, experts say.
Daniel Hemmant, who handles currency investments for Guinness Flight Asia, said: 'I'm fairly comfortable at the moment.
'But you have to be aware of the downside risk, which is increasing.' The Indonesian central bank has long pursued a policy of allowing the rupiah to depreciate gradually - an average of 3.9 per cent annually for the past 10 years, according to Mary-Anne Chan, regional manager of Lippo Investments Management.
In this way, the currency is kept fairly cheap maintaining the competitiveness of Indonesian exports.
The differential between the country's domestic inflation rate and those of its trading partners can be minimised without the rupiah having to take any large hits through devaluation.
This year, however, the central bank has widened the currency's trading band three times, edging it outwards from 3 per cent last December to 8 per cent now.
The latest action, taken on September 11, sparked the rupiah's largest single-day advance in more than a year, strengthening the currency by 0.67 per cent to trade at 2,333 rupiah per US$1.
Ms Chan said the surprise move probably signalled the central bank's intention to have the nation's currency depreciate a bit more slowly.
This would make rupiah-based investments even more attractive to foreigners.
Foreign investors have long relied on the predictability of the rupiah's downward slide to gain access to Indonesia's high interest rates.
Rates typically run at about 15 per cent, compared with 6.8 per cent for Hong Kong time deposits.
Knowing they could count on the currency dropping by no more than about 4 per cent, foreign investors in Indonesian rupiah could lock in a spread of five percentage points or so.
Ms Chan said the yield could be enhanced by investing in Indonesian commercial paper, which she said was earning 18 per cent to 19 per cent in terms of rupiah.
If the currency depreciated more slowly, she said, the spread could widen even further.
But the increasing popularity of this investment strategy has put upward pressure on the currency and the central bank has had to intervene regularly to keep the rupiah within its trading band.
Mr Hemmant said: 'There's a lot of quite hot money in the rupiah.
'Everybody goes in there and sits there for the carry, the interest-rate differential.
'The weight of money is enough to push the currency up.' By widening the trading band, he said, the central bank had given itself more room to manoeuvre, both to keep the currency from appreciating as hot money continued to move in, and to prevent it from depreciating if political events sparked sell-off.
The magnitude of Indonesia's political risk was seen in late July, when government troops raided the opposition party's headquarters, providing the catalyst for the country's worst riots in decades.
It was seen again on Thursday, when the rupiah dived by 0.3 per cent on speculation that strongman President Suharto had been taken ill.
Mr Hemmant said despite the rupiah's recent volatility, he expected the currency to continue to trade towards the strong end of its band.
'We'll go back to the same sort of trading pattern that we've seen previously.
'So, you'll continue to get your high interest rates.
'You'll continue to get a currency that's not going down terribly quickly,' he said.
'But you have to watch the situation.'
