ASEAN KEY DESTINATIONS
Inflation, policy risk in Indonesia
Market players should approach Asian currencies with caution this year over inflation concerns and policy risks, Bank of America Merrill Lynch said on Thursday.
"Investors who want to gain in capital and currency markets should rely more on capital markets this year," Christy Tan, Merrill Lynch's director of local currency strategists, said during a news conference.
Policy risk is the primary worry affecting the currency market in Asia, she said. Merrill Lynch expects more regulation by Asian central banks and authorities in an attempt to guard the region from massive inflows of hot money.
She also said the trend of inflationary pressure throughout the region will push Asian central banks to increase interest rates.
"In Indonesia, I expect a 100 basis points raise for 2011," Christy said, indicating the raise would be done in four stages and may start in February.
Merrill Lynch expects the rupiah to be stable at around 9,000 to 9,100 to the US dollar.
"We advise approaching the rupiah more carefully this year. We don't see a great appreciation in the rupiah. In fact, we expect it to be stable at around 9,000," Christy said.
The risk to the rupiah comes from foreign investment in Indonesia's debt market, Bank Indonesia certificates (SBI) and government bonds.
Foreigners hold about 30 percent of total bonds outstanding in Indonesia, she said, and the bottom could fall out of the market - not because of Indonesia's internal problem but because of improvements in the West.
"The US economy could grow better than we expect, and investors might want to go back to the developed market."
Bank Indonesia's first priority needs to be regaining the market's confidence by tightening monetary policy, she said.
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