Analysts have given the thumbs-up to Bank Indonesia (BI) for the measures prepared to tackle the projected increase in capital inflows following the latest US stimulus measures.
More foreign funds are expected to flow into Indonesia’s stock and debt market following the latest US moves as Indonesia remains one of the most attractive emerging markets that can offer higher returns on investments, analysts said.
As reported on Saturday, BI’s director of monetary policy research Perry Warjiyo said the central bank had prepared several measures to safeguard against potentially adverse effects
These measures, according to Perry, could include raising the minimum holding period for BI certificates (SBIs), extending the length of term deposits and raising foreign exchange minimum reserve requirements.
“The package is [ready]. But it will be applied depending on the impact of [US] quantitative easing on the capital flow and exchange rate,” Perry told reporters recently.
Martin Panggabean, an economist at Bank Mandiri, said BI’s early preparations of a basket of measures were a good sign that it was concerned about potential outflows, especially after the US announced that it planned to inject $600 billion into its economy.
The US Federal Reserve System recently announced that it would shore up US economic recovery through a round of quantitative easing, planning to buy US$600 billion in longer-term Treasury securities in phases until the middle of next year.
The move will increase the money supply to promote lending and liquidity and is expected to result in increased capital flows to emerging markets that offer higher returns, as near-zero interest rates have failed to boost economic growth in the world’s largest economy.
“More capital inflows in the short-term could potentially result in outflows for the longer-term,” Martin added.
Analysts agreed that BI’s prepared set of measures would help avoid the threat of a sudden reversal and would help reduce currency volatility that could result from incoming foreign funds.
According to BI, the rupiah has appreciated by about 5 percent so far this year, trading in the range of Rp 8,900 against the US dollar.
Analysts believed that BI had been guarding the rupiah from further appreciating by buying US dollars as the trend could hurt exports.
As a result, foreign exchange reserves have continually increased, and, according to BI, could reach $100 billion by the end of the year.
“But BI’s capacity is limited,” University of Indonesia (UI) economist Chatib Basri told The Jakarta Post in a telephone interview on Sunday.
If foreign reserves continue to increase, it will result in higher cost of funds, which will in turn force the central bank to tighten payment of foreign debts.
Chatib, who considered the central bank’s package as “an administrative” help, said the government and private sector could also help in order to help manage a potential flood of capital inflows.
“The most important things are, first, for companies to launch initial public offerings [IPOs] so they could help meet foreign demand.
“And the second, how to shift the funds in the financial market to infrastructure projects which are long-term in nature,” Chatib explained.
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