It is worth noting that Indonesia, with its open economy and free-capital movements, is often susceptible to hot money.  This is particularly apparent in the stock market in our view given the country’s lack of liquidity, which could result in erratic index movements.  

On the bond market, foreign ownership in government bonds has reached Rp 131.6 trillion (US$13.9 billion), or 22 percent of the total, up Rp 24 trillion since the beginning of the year. A similar figure could be found in the Bank Indonesia certificates (SBI), which were held 22 percent by foreigners, amounting to Rp 67 trillion.

Comparing to last year over the same period (i.e. January to March 2009), the government and capital market participants were afraid of sudden capital flight as foreigners sold government bonds amounting to around Rp 7.8 trillion, equal to $700 million, using average Rp 11,647 per $1 as of March 2009.

We believe that capital inflows to Indonesia have been the result of many positive signs from the Indonesian economy, such as resilient economic performance coupled with improved rating for Indonesia’s long-term debt.  

In the bond market, interestingly, those positive indicators could cover the concerns regarding possible limited higher bond price this year compared to last year on the back of expected higher inflation rates and a possible benchmark rate  increase to 7% from the current 6.5%.

The question is how to work out the timing for when fund flows will leave Indonesia or when foreigners are content to stay in the market.

In our view, this will in part be determined by the state of global uncertainties.  As long as recovery in the US and EU remains dubious, we believe Indonesia will provide an attractive investment destination for foreigners given the country’s large domestic consumption.  

In the US investors are still anxious about US economic prospects, especially on the unemployment figure and the Fed’s future exit plan. The market still believes the March unemployment rate will stay at the current level of 9.7% while the US household spending figure in February could have remained unsustainable.

In the eurozone, fiscal problems faced by the PIIGS (Portugal, Italy, Ireland, Greece, and Spain) are still the main concern for investors.  As reported, Greece’s 12.7 percent deficit for 2009 is four times over the EU limit, spotlighting the eurozone authority’s inability to restrict members’ debts and deficit.

Fears of a Greek default also highlighted the lack of a safety net for EU member states.

Unfortunately, prolonged discussions about the bailout scheme for Greece are making investors nervous, offsetting positive news on the March  economic confidence index in the eurozone which posted an improved figure of 97.7, the highest in the last 23 months.

Indonesia’s boom has also been attributed to China’s tightening economic policy in 2010.  This has made the North Asian countries less attractive for investment from foreigners.  Testimony to this is that the Shanghai Composite Index year-to-date performance has fallen 4.2%, followed by the Taiwan Composite Index (-3.5%) and the Hang Seng Composite Index (-2.7%).  These performances pale relative to Indonesia’s stock market performance which has increased 7.8% year-to-date, the best in Asia.   

In sum, we believe that short-term capital could still remain in Indonesia for as long as global economic uncertainties remain and China’s tightening continues.  While no one can predict when short-term liquidity or hot money will flow out of Indonesia, we believe the government should remain focused on maintaining a positive long-term investment climate and ensure that infrastructure-related project implementation is on the right track.  Thus, rather than worrying about hot money, Indonesia should demonstrate monetary and price stability as well as improve overall economic fundamentals.  

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