European woes may further hurt rupiah, stocks

Concern that some European nations will find it difficult to finance their budget deficits might further cast a shadow in the local stock and currency market.

Like many other Asian currencies, the rupiah’s value dropped significantly on Friday as concern over widening budget deficits in several European countries such as Greece and Spain hit global markets.

The rupiah dropped 0.8 percent to Rp 9,240 against the US dollar on Friday, its biggest lost since Nov. 27.

European jitters also dragged down the Indonesian stock market, with its main Composite Index losing 74.24 points or 2.9 percent to close at 2,518.98, its lowest level since Nov. 27, last year.

However, analysts said they are optimistic the confidence across the local stock and currency markets would gradually return, given the strong condition of the country’s economic fundamentals.

Citi analyst Johanna Chua said that Bank Indonesia’s move to keep its benchmark rate low at 6.5 percent last week provided a positive incentive in the local market, because other Asian central
banks had begun to raise their interest rates.

“BI’s outlook for a higher balance of payment surplus as well as steady flow of foreign capital should be supportive to the rupiah,” she said.

Standard Chartered economist Eric A. Sugandi said the current BI rate level would be “conducive” for economic growth and the rupiah.

BI expects the economy to expand 5.2 percent this year, up from 4.3 percent projected growth rate announced in 2009. The Central Statistics Agency will announce the official growth figure on Feb. 10.

The rupiah rose 1.9 percent in January as investors put confidence in Indonesia’s economy, the central bank said, while analysts expected the currency to further strengthen due to surging capital inflows.

The local currency was slightly more stable in January, ending the month at 9,350 against the US dollar. The rupiah even touched 9,153 per dollar, the highest level since October 2008 when the global financial crisis erupted, the central bank said.

“Investment risk perceptions in Indonesia were relatively good, in line with the relatively maintained positive expectations towards the exchange rate of the rupiah,” the central bank said.