Rupiah's fortunes as region's best currency to fade as Indonesia's tax amnesty nears end

A teller in Bank Indonesia's headquarters counts rupiah bank notes in Jakarta, Indonesia on April 21, 2016.
A teller in Bank Indonesia's headquarters counts rupiah bank notes in Jakarta, Indonesia on April 21, 2016.PHOTO: REUTERS

KUALA LUMPUR (BLOOMBERG) - The rupiah's reign as Southeast Asia's best currency is set to be short-lived as the supportive inflow from a US$12.3 billion (S$17.76 billion) tax amnesty programme is about to be slammed shut.

The currency will slump more than 2 per cent by March 31 as the market's focus returns to Indonesia's current-account deficit and as rising US interest rates lure money away from emerging markets. Bank of Tokyo-Mitsubishi UFJ says the rupiah will suffer as the dollar strengthens, while Standard Chartered predicts the currency will drop through the first half as the deficit widens.

"A significant portion of funds under the tax amnesty would be repatriated by the end of December, which would ease some supporting flow for the rupiah," said Teppei Ino, an analyst at Bank of Tokyo-Mitsubishi in Singapore. "We are also likely to see the somewhat strong dollar trend remain in the first quarter."

The rupiah strengthened for four straight quarters through September as the amnesty and a slew of economic reforms overshadowed the current account that's been in deficit since 2011. The authorities expect the program will bring in as much as 165 trillion rupiah (S$17.79 billion) before it ends on March 31, compared with the 100 trillion rupiah it had attracted as of Dec 9.

Bank of Tokyo-Mitsubishi predicts the rupiah will weaken to 13,700 per US dollar by March 31, matching the median forecast in a Bloomberg survey of 31 analysts. The decline of 2.2 per cent would make it the worst performer in Asia over the period, based on a Bloomberg survey of analysts.

The currency has gained 3 per cent this year, more than four times as much as the second-placed Thai baht. It closed at 13,393 on Friday.

"The macro environment won't be weak for Indonesia with the tax revenue from the amnesty program to be used for infrastructure development," Bank of Tokyo-Mitsubishi's Ino said. "The weaker rupiah forecast is more driven by the dollar story."

Not everyone is negative. TMB Bank, the top rupiah forecaster in Bloomberg rankings for the third quarter, predicts the currency will fall as low as 13,500 per dollar this quarter before recovering to 13,000 by the end of March due to "robust economic activity" and a halt in the dollar's rally.

Southeast Asia's biggest economy expanded 5.02 per cent in the third quarter from a year earlier, the government said last month. Bank Indonesia has lowered interest rates six times this year to spur lending and stimulate domestic demand.

"We expect to see the Indonesian economy perform well in 2017," said Jitipol Puksamatanan, a strategist at TMB Bank in Bangkok. "GDP growth should exceed 5 per cent with robust support from many fiscal and monetary policies."

Standard Chartered forecasts the rupiah will weaken to 13,500 by the end of March and slide to 13,700 by June as the current-account deficit widens and demand for the dollar rises.

"While central bank intervention and likely repatriation related to the tax amnesty may provide a near-term respite for the rupiah, we expect any dips in dollar-rupiah to be shallow," Divya Devesh, a foreign-exchange strategist at Standard Chartered in Singapore, wrote in comments last month that he confirmed last week.

"Lower real policy rates remove an important buffer for the rupiah during periods of market stress, particularly in an environment of higher US real rates," he said.