Indonesian Rupiah

Marit Olsen
Adi Piersol
Cara Prell
Carla Villafuerte
Part I: Short Term Technical
Analysis
One Week:
Market Momentum: Strengthen or Weaken
Bollinger Band: Weaken
Moving Average: Strengthen or Weaken

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Market Momentum Analysis
• Forecast:
Either way…

• Consistent strength
over the past seven
months.

• Moving quite a bit

within the upper band.

• Overall strengthening
pattern, however it is
possible that the
currency could weaken
as seen in previous
weeks and rise again.

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Bollinger Band Analysis
• Forecast:
Weaken

• Overbought and
should
depreciate.

• Recent 30 day
strength shows
signal may not
be strong.

• Fluctuating
within the upper
band.
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Moving Average Analysis
• Forecast:
Either way…

• No strong
upswing or
downswing.

• Crossover has not

happened for
some time.

• Currently dancing
around above the
moving average
line.
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Part II: Asset Choice Interest Rate
Differentials
Current Situation
• Fiscal policy:
– Expansionary in 2006.
– A recovery in investment demand will enable
real GDP growth to average 5.8% Inflation
will rise in 2006.
– High merchandise trade surpluses will
enable the current account to record healthy
surpluses in both 2006 and 2007.

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Continue…
• Political outlook
– Deal with Australia (short-term), but no big
risks
• Economic policy outlook
– No change
• Economic Forecast
– Signs of inflation = hinders potential for
consumption growth. Affected by high energy
prices.

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Asset Choice Interest Rate
differential model
• Indonesia
- Jan to March BI rate: 12.75% [1]
- 3-Month IR on guarantee: 10.05%
- Government Bonds: varies from 8 – 12 % [2]

• U.S.
- March 2006: 4.5% Fed funds rate
- April 2006: 4.75% Fed funds rate

*** Interest rates differential for the last three months,

suggest a strengthening of the currency in the short-
term (3-months)

[1] http://www.thejakartapost.com/detailbusiness.asp?fileid=20060429.M01&irec=0
[2] http://www.bi.go.id/web/en/Indikator+Moneter+dan+Perbankan/Suku+Bunga/default.aspx?pageid=3

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Non-Inverted Chart with a time line
of 3-Months (strengthening)

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Balance of Payments Model
• Current account balance: $7.5 billion
• Exports: $58.8 billion
• Imports: $-35.6 billion
• Trade balance: $23.2 billion (surplus)

– Indonesia is a manufacturing country and the economy

depends on it (like many other countries in the APAC
region).
– Because of the stable higher interest rates compared to
the US or the Eurozone the country expects capital
inflow, which can cause increase in demand of the IDR,
thus causing strengthening of the IDR in the short-term
(3 months).

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Advice
• The fact that these two forecasts (the one-week and the
3-month) yield opposite results coincides with our belief
that short term forecasting is not very reliable.
• Due to this discrepancy, a firm with transaction exposure
would benefit from hedging using either:
- forward, future, option contract, or money market
hedge.

• We believe that firms with transaction exposure should

hedge regardless of forecasting results—specially in the
short-term!— since foreign exchange is not their core
line of business.

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To illustrate our results we look at
Nike in Indonesia
• The company has a district office and
30 factories in Indonesia.
• The Asia Pacific Region 3rd largest in
terms of revenue and 1st in terms of
manufacturing.

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Transaction Exposure Situation for Nike
• Transaction Exposure Situation: Nike has a short term receivable in
Rupiah from exported merchandise.

• Since the short term forecast is unclear, we believe Nike should

hedge this position.

• Weakening:
(as our one week analysis predicts) This receivable will be worth
less US Dollars in the future, so Nike should hedge the position to
lock in the higher exchange rate.
• Strengthening:
(as our three month analysis shows) This receivable will amount to
more US Dollars upon maturity, so if Nike believes in its forecast it
would not hedge its receivable and let the Rupiah appreciate against
the dollar.

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Part III

Long Term(5 years) PPP

• U.S annual rate of inflation is 3%

• Indonesia’s annual rate of inflation 16%
According to the Bank of Indonesia http://www.bi.go.id/web/en/Indikator+Moneter+dan+Perbankan/Inflasi/
http://www.bi.go.id/web/en/Indikator+Moneter+dan+Perbankan/Inflasi/

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History of Inflation

May 2005 – March 2006

May 7.40% November 18.38%
June 7.42% December 17.11%
July 7.84% January 17.03%
August 8.33% February 17.92%
September 9.06% March 16.0%
October 17.89% http://www.bi.go.id/biweb
http://www.bi.go.id/biweb//

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Forcast for the spot Rupiah 5 years from now

• 8810.57(1+.16)^5/(1+.03)^5
• 8810.57(2.100/1.156)
• 8810.57(1.8166)
• Future spot rate: INR16005.3

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What does this mean??

The currency will depreciate (weaken) over

the next five years.

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Part IV: International Fisher Effect

• Long Term Forecast: 5 years into the future

• United States 5 year Treasury bond rate:
4.91%
• Indonesia 5 year Treasury bond rate:
11.67%
• USD/IDR = 8785 Rupiah per 1 US Dollar

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IFE Continued . . .
• IFE Spot Rate for European Terms Currency =
Current Spot Rate x ((1 + interest rate
Indonesia)n /(1 + interest rate US)n)
• IFE Spot Rate = 8785.0000 * ((1+.1167)5 /
(1+.0491)5)
• IFE Spot Rate = 12004.3849 Rupiah per 1 US
Dollar
• Weaken: roughly 3200 more Rupiah to equal 1
US Dollar
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Long Term Forecast Advice

• Consistency in our Long Term Forecasts

5 year analysis PPP: weakening rupiah
5 year analysis IFE: weakening rupiah
• Difference in the magnitude
PPP: 16005 IDR per 1 USD
IFE: 12004 IDR per 1 USD

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Advice Continued . . .
• Transaction Exposure: Indonesian firms hedge
payables not denominated in IDR
• Non-Indonesian firms should hedge receivables
in IDR

• Profit Remittance: If company must remit

earnings, due so immediately
• Once again, Forex is not core line of business

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Economic Exposure Situation for Nike

• Unknown future cash flows from

manufacturing contractual agreements
and selling in the Asia Pacific Region
• Force invoice decision to Rupiah
• Lead uncovered payments at least until
USD/IDR = 12004

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