Indonesian Rupiah Marit Olsen Marit Olsen Adi Piersol Cara Prell Carla Villafuerte

2 Part I: Short Term Technical Analysis One Week: Market Momentum: Strengthen or Weaken Bollinger Band: Weaken Moving Average: Strengthen or Weaken

3 Market Momentum Analysis Forecast: Forecast: Either way… Consistent strength over the past seven months. Consistent strength over the past seven months. Moving quite a bit within the upper band. 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. Overall strengthening pattern, however it is possible that the currency could weaken as seen in previous weeks and rise again.

4 Bollinger Band Analysis Forecast: Weaken Forecast: Weaken Overbought and should depreciate. Overbought and should depreciate. Recent 30 day strength shows signal may not be strong. Recent 30 day strength shows signal may not be strong. Fluctuating within the upper band. Fluctuating within the upper band.

5 Moving Average Analysis Forecast: Forecast: Either way… No strong upswing or downswing. No strong upswing or downswing. Crossover has not happened for some time. Crossover has not happened for some time. Currently dancing around above the moving average line. Currently dancing around above the moving average line.

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

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

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

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

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

11 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. 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: 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. 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.

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

13 Transaction Exposure Situation for Nike Transaction Exposure Situation: Nike has a short term receivable in Rupiah from exported merchandise. 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. Since the short term forecast is unclear, we believe Nike should hedge this position. Weakening: 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: 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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18 Part IV: International Fisher Effect Long Term Forecast: 5 years into the future Long Term Forecast: 5 years into the future United States 5 year Treasury bond rate: 4.91% United States 5 year Treasury bond rate: 4.91% Indonesia 5 year Treasury bond rate: 11.67% Indonesia 5 year Treasury bond rate: 11.67% USD/IDR = 8785 Rupiah per 1 US Dollar USD/IDR = 8785 Rupiah per 1 US Dollar

19 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 for European Terms Currency = Current Spot Rate x ((1 + interest rate Indonesia) n /(1 + interest rate US) n ) IFE Spot Rate = * (( ) 5 / ( ) 5 ) IFE Spot Rate = * (( ) 5 / ( ) 5 ) IFE Spot Rate = Rupiah per 1 US Dollar IFE Spot Rate = Rupiah per 1 US Dollar Weaken: roughly 3200 more Rupiah to equal 1 US Dollar Weaken: roughly 3200 more Rupiah to equal 1 US Dollar

20 Long Term Forecast Advice Consistency in our Long Term Forecasts Consistency in our Long Term Forecasts 5 year analysis PPP: weakening rupiah 5 year analysis PPP: weakening rupiah 5 year analysis IFE: weakening rupiah 5 year analysis IFE: weakening rupiah Difference in the magnitude Difference in the magnitude PPP: IDR per 1 USD PPP: IDR per 1 USD IFE: IDR per 1 USD IFE: IDR per 1 USD

21 Advice Continued... Transaction Exposure: Indonesian firms hedge payables not denominated in IDR Transaction Exposure: Indonesian firms hedge payables not denominated in IDR Non-Indonesian firms should hedge receivables in IDR Non-Indonesian firms should hedge receivables in IDR Profit Remittance: If company must remit earnings, due so immediately Profit Remittance: If company must remit earnings, due so immediately Once again, Forex is not core line of business Once again, Forex is not core line of business

22 Economic Exposure Situation for Nike Unknown future cash flows from manufacturing contractual agreements and selling in the Asia Pacific Region Unknown future cash flows from manufacturing contractual agreements and selling in the Asia Pacific Region Force invoice decision to Rupiah Force invoice decision to Rupiah Lead uncovered payments at least until USD/IDR = Lead uncovered payments at least until USD/IDR = 12004