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BI studies foreign fund limit on SBIs
The central bank is studying the possibility of limiting foreigners’ holdings in its short-term bills, to put tighter controls on ‘hot money’ and help prevent possible sudden capital market outflows
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he central bank is studying the possibility of limiting foreigners’ holdings in its short-term bills, to put tighter controls on ‘hot money’ and help prevent possible sudden capital market outflows.
Darmin Nasution, Bank Indonesia senior deputy governor, told Bloomberg Thursday that the central bank is “studying” such a possibility but refused to elaborate, but was also firm in saying that there would not be full capital flow controls in the country’s foreign exchange regime.
The central bank issues bills mainly to help absorb excessive money in circulation in order to help control the rate of inflation. There are various types of bill tenure (lengths of issue), including one month, three months and six months.
However, with Indonesia’s economy holding on steadily against the impacts of the global economic downturn, the bills have attracted the interest of foreign parties, triggering robust inflows of capital.
While inflows are beneficial for the economy, the central bank is concerned over the possibility of volatility in investment appetite which could lead to abrupt or large scale withdrawals from the market resulting in pressure on the local currency and overall economy.
A source close to BI said that the bank would focus on the option to limit foreign ownership of one-month bills.
The source said such a move would be aimed at getting foreign investors to shift to longer maturity bills and stay longer in the market.
“For example, they [would] have to buy 3-month bills instead of one-month ones,” said the source as reported by Reuters online.
At present, up to Rp 47 trillion (about US$4.9 billion) of foreign funds are placed in central bank short-term bills.
BI deputy governor Hartadi Sarwono said that measures intended to control potential hot money flows were probably necessary, citing Brazil and Taiwan as examples of developing economies which had felt the need to take such steps.
Sarwono said that possible curbs on foreign holdings of short-term debts were just one of the options the central bank was studying. Nonetheless rupiah currency moves linked to money flows were still manageable, he added.
Standard Chartered Bank economist Fauzi Ichsan said recently that Indonesia had become a destination for foreign investment since it had posted a relatively high growth while other major economies had slumped.
“The government actually could benefit from this inflow,” he said.
“While these funds could be categorized as hot money which is quick to enter and leave the country, the government should turn those funds into direct investment in the country’s real sector,” Fauzi said.
There has been growing unease in emerging markets about a flood of foreign investment inflows this year, which some blame on a weak dollar and the liquidity being pumped into economies to counter the continuing negative effects of the global financial crisis and consequent economic downturn.
One significant background factor is that the rupiah is currently Asia’s top performing currency, up nearly 16 percent so far this year against the dollar, according to Bloomberg.
The stock market jumped 80 percent and bonds rallied very positively so far this year, in part thanks to massive capital inflows as confidence in the positive indicators reflecting the recovery of the country’s economy has surged ahead. (bbs)
