Rupiah’s Recovery Is Tested as Indonesia Keeps Cutting Rates

(Bloomberg) -- The Indonesian rupiah’s remarkable rebound from a two-decade low is being steadily eroded as interest-rate cuts fail to arrest slumping inflation and debt monetization rattles investors.

The currency slipped 0.7% on Friday, extending its losing streak to four days, after Bank Indonesia lowered benchmark borrowing costs Thursday for a second straight month. Policy makers also signaled there may be more cuts to come, prompting analysts from HSBC Holdings Plc and ING Groep NV to see the risk of further weakness for the rupiah.

The currency is now the worst performer in Asia this month as sentiment turns after it surged back last quarter from levels last seen during the Asian financial crisis. Its drop Friday, from a seven-week low, prompted BI to intervene in the market to help stabilize trading.

“IDR may be susceptible in the near term during bouts of market uncertainty after the recent policy rate cut,” said Nicholas Mapa, a senior economist at ING in Manila.

Much will depend on second-quarter gross domestic product data due next month. If the figures are no worse than expected, the central bank may be able to focus currency stability at its Aug. 19 meeting, said Mapa.

Debt Monetization

As well as cutting rates four times this year, BI has pledged to buy billions of dollars of government bonds to help finance the budget deficit.

HSBC, which sees the central bank as more focused on economic growth than currency risks for now, forecasts the rupiah to weaken to 15,200 versus the dollar by the end of the year. It traded at 14,725 at 10:10 a.m. in Jakarta.

Still, a more gradual pace for any further rate cuts could help ease market concerns about BI’s debt purchases, according to HSBC’s chief Asean economist, Joseph Incalcaterra.

Global Uncertainty

“More easing from here would be net negative for IDR presumably but it is by no means the only determining factor,” said Wellian Wiranto, an economist at Oversea-Chinese Banking Corp. in Singapore, who sees overall global sentiment as crucial.

This view was echoed by Mitul Kotecha, senior emerging markets strategist at TD Securities, who noted that the rupiah is also hostage to gyrations in dollar.

Any resumption in the Indonesian currency’s uptrend will require foreign inflows, Kotecha said.

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