Indonesia yesterday took action to channel strong capital inflows away from short-term investments in the latest effort by an emerging market concerned that hot money could threaten financial stability.
Less than a week after South Korea imposed tighter currency controls on forward trading, Indonesia’s central bank announced various measures, including a minimum holding period for its bills (SBIs) and a wider overnight policy corridor — both designed to make short-term investments less attractive.
It also said it would introduce longer-term central bank bills to give more options to investors betting on the prospects of a country many analysts already rank alongside the BRIC nations of Brazil, Russia, India and China, and which is expected to achieve an investment grade credit rating within two years.
Analysts said the measures would not deter investors, who already own a record 149 trillion rupiah (US$16 billion) in government bonds, or spur capital flight.
Instead, they would be recognized as an attempt to encourage longer-term investment in a country enjoying a period of political stability and healthy economic growth expected by the IMF to be 6 percent this year and next.
“It’s part of a package to tackle capital flows,” said Joanna Tan, an economist with the Singapore-based Forecast. “They see hot money coming in and are trying to direct it to longer-term investment. Hot money flows will be reduced by this ... but the risk appetite for Asia is still strong.”
Market reaction in Indonesia was relatively calm. The rupiah extended early gains slightly, while stocks held on to an early rise to close up 1 percent.
The central bank said its measures should not be seen as capital controls, although capital inflows “must be managed” because they were a challenge.
“These measures are aimed at strengthening the effectiveness of our monetary operation, maintaining financial market stability as well as to deepen the financial markets,” acting central bank governor Darmin Nasution said.
Included in the measures though is a requirement for investors to hold any central bank debt for at least one month.
“Bank Indonesia says they are not capital controls, but they are quasi-capital controls — still a form of management,” Tan said.
Investment funds have been flooding into emerging markets as they bounced back from the global downturn much more rapidly than the developed world.
That prompted both Brazil and Taiwan to impose capital controls late last year and other countries, including Russia, are considering similar measures.
South Korea announced new rules on currency trading intended to reduce volatility in its markets.
Indonesia’s economy kept growing even as the rest of the world was in recession during the financial crisis thanks to a combination of strong domestic consumption and demand for its natural resources, such as coal, palm, coffee and cocoa.
The world’s rapidly shifting capital was drawn to Indonesia’s high interest rates, underlined by a central bank policy rate of 6.5 percent as rates were slashed to historically low levels in the West, in some cases close to zero.
Reflecting pressure from foreign inflows, the rupiah rose 17 percent against the dollar last year and was by far the strongest currency monitored daily by Reuters. It’s up close to 3 percent this year, the second-strongest performer behind the ringgit.
One-month SBIs, which paid an interest rate of more than 6.26 percent earlier this month, are a popular choice of foreign and local investors because of their high yield and liquidity, which makes them easily tradeable.
In an attempt to shift more investment into longer-term maturities, Bank Indonesia (BI) said it will start issuing 9-month SBIs from August and 12-month SBIs from September. The longest maturity previously had been 6 months.
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