-- Dollar illiquidity and current account deficit add to pressures on ailing rupiah -- Bank Indonesia stepping up efforts to restore dollar liquidity -- Rupiah to maintain weakness in short term, say analysts -- Current account should improve as Europe sentiment changes, says OCBC analyst By Ben Otto JAKARTA--Indonesia's beleaguered rupiah could be facing continued pressure ahead, its fate dependent on the central bank's ability to restore dollar liquidity and foreigners' appetite for risk. The rupiah is the second-worst performing currency in Asia this year, falling almost 4% year-to-date and 2.6% since May as foreign investors exited the local market amid euro zone fears. Credit Suisse recently raised its three-month dollar forecast to IDR9,750 from IDR9,200, while Citi warned of "growing upside risk" to its year-end forecast of IDR9,350. The dollar, which began the year below IDR9,100, was at IDR9,450 in afternoon trade in Asia on Monday. A lack of dollars as foreigners rushed to cash in rupiah assets has exacerbated the recent slide. At one point demand for dollars pushed the local currency to its weakest level since December 2009, while commercial banks' exchange rates for the dollar stood 600 rupiah higher than those of the spot market, which Bank Indonesia was keeping artificially low. The normal difference is 50 rupiah or less. "That's a clear sign that the market is dysfunctional," said Gundy Cahyadi, an economist at OCBC in Singapore. "And the key factor is the lack of dollar liquidity." In response, BI has stepped up its market intervention, selling perhaps $2 billion in the currency market over the course of one week--a high for the year--despite some concern about its falling foreign reserves. The currency's volatility will depend on whether steps to increase dollar liquidity bear fruit. Traders will be watching one such measure--the introduction of dollar term deposits Wednesday--which analysts say could add $6-$12 billion to reserves of about $110 billion to use for intervention. Analysts say the measure, though a small part of the bigger picture, is a signal that BI is actively addressing market needs. A more difficult problem is the growing weakness of Indonesia's current account. Indonesia recorded its second straight quarterly current account deficit in January-March, leaving the country's overall balance of payments in deficit. That's not likely to improve soon. In May Indonesia recorded its first monthly trade deficit in almost two years, and last week the trade minister said the 2012 trade surplus is likely to shrink to $5 billion from $26.3 billion, as declining commodity prices and slower global demand cut into exports. Attracting foreign direct investment will be crucial to counter the current account deficit. But Prakriti Sofat, an economist at Barclays in Singapore, said FDI going forward "will likely be dampened given recent headlines and regulatory uncertainty over sectors like banking and mining, and the political landscape in the runup to 2014 elections isn't likely to reverse that." Citi has revised its 2012 current account deficit forecast to 1.9% of gross domestic product from 1.0% previously, cautioning that the total amount will likely be equal to FDI, putting extra pressure on portfolio inflows. In the long term, analysts remain upbeat. Fitch Ratings said last week that the fundamental strengths that led it to raise Indonesia to investment grade status in December remain intact. OCBC's Mr. Cahyadi, too, said "fundamentally the country is in as good--or just slightly worse--a situation than it was last year. Projections of steady 6%-6.5% growth should be positive for investment inflows...[and Indonesia] has oil and commodities, so the current account deficit here looks temporary. When European fears subside, exports will recover." That should stem the current account losses, eventually helping strengthen the rupiah. Write to Ben Otto at ben.otto@dowjones.com (END) Dow Jones Newswires June 11, 2012 02:43 ET (06:43 GMT)