Rupiah strengthens to four-month high after economy opened up

[SINGAPORE] Indonesia's rupiah rose to an four-month high on optimism the opening up of the economy to more foreign involvement will lure inflows.

The revised investment list, which allows greater foreign participation in a range of industries from toll roads to cinemas, reflects the government's credit-positive focus on infrastructure development and recognizes that private funding is necessary, Moody's Investors Services said in a report dated Feb 15.

Indonesia's two-year bonds rose, pushing the yield to a nine-month low, before a policy review on Thursday at which a rate cut is forecast.

The rupiah climbed 0.3 per cent to 13,339 a US dollar as of 9:29 am in Jakarta, according to prices from local banks. It rose to 13,303 earlier, the strongest level since Oct 15, and has rallied 3.1 per cent this year in the best performance among Asian emerging markets after Malaysia's ringgit.

DBS Group Holdings Ltd raised its year-end forecast for the rupiah on Tuesday to 13,703 from 15,000.

"The sentiment towards the rupiah is quite positive at this point," said Ho Woei Chen, an economist at United Overseas Bank Ltd in Singapore.

"They expanded the investment list for foreigners. As a result of that there is more prospect of more capital inflows," she said, adding that UOB is reviewing its 13,900 year-end projection.

The government will let non-Indonesians hold 100 per cent stakes in toll roads, cinemas, cold storage, pharmaceutical raw- material manufacturing and restaurants, Coordinating Minister for Economic Affairs Darmin Nasution said last week.

The reforms are "encouraging" and slower inflation gives Bank Indonesia room to support the economy, Joey Cuyegkeng, an economist at ING Groep NV in Manila, wrote in a note on Monday.

Bank Indonesia will cut its policy rate by 25 basis points to seven per cent this week, according to 16 of 26 analysts surveyed by Bloomberg, with the remainder seeing no change. That would be the second reduction this year.

Slower inflation, which has stayed below five per cent over the last three months after exceeding seven per cent in the middle of last year, has lured almost US$5 billion of foreign funds to Indonesia's local-currency sovereign bonds since the end of September.

The yield on the two-year government notes fell six basis points to 7.6 percent, taking its decline this year to 101 basis points, Inter Dealer Market Association prices show. That matched the level on Feb 12 that was the lowest since early May 2015.

"Expectations for a cut in interest rates should be negative for the currency because the yield in the rupiah assets would be lower," said UOB's Ms Ho.

"But people are looking at the positive effect of the interest-rate cut on growth."

BLOOMBERG