Bank Indonesia (BI) downplayed on Tuesday market concerns that the influx of foreign funds into the country’s debt and equity markets could hurt the economy.
Speaking at a press conference in Jakarta on Tuesday, BI deputy governor Hartadi Sarwono said there was no need to worry about the rapid inflow of foreign capital as it signified more advantages rather than disadvantages to the economy.
Rather than focusing on unnecessary policies to control inflows, the central bank would instead focus on how to maintain them and to ensure capital stayed longer, Hartadi said.
“As far as 2010 goes, there has been no major reversal. Capital inflow has been manageable. The most important thing is to make foreign investors more comfortable, and stay longer in Indonesia ,” he said.
According to Hartadi, the central bank should not rush to stop the inflows as it needs foreign funds to finance economic activities, especially in infrastructure. Domestic funds alone, he added, were not enough to meet the needs of the economy.
“We need more inflows.”
The massive inflow of foreign capital into the country’s debt and stock markets in recent months has resulted in sharp increases in foreign holdings in BI certificates (SBIs), at about 25 percent, while foreign ownership of government bonds (SUN) is almost at 30 percent, the highest ever. Foreign funds have also contributed to constant increases in share prices locally.
BI data shows that foreign funds pumped into the debt and stock markets reached a total of Rp 115 trillion (US$12.88 billion) from January to the end of September this year. Of the total, Rp 20.5 trillion went to SBI notes, Rp 74 trillion to SUN and Rp 21 trillion into equities.
The inflow of foreign capital also helped increase foreign exchange reserves to $86.5 billion at the end of September up from $50.6 billion at the end of December 2009.
The flow of foreign funds into the nation’s stock and money markets has also contributed to the strengthening of local currency. The rupiah hit a three-year high of Rp 8,905 earlier in August and has risen 5.6 percent so far this year, BI data showed.
Darmin said that it was not yet necessary for the central bank to intervene because the appreciation of the Indonesian currency was still within same parameters as other South Asian currencies. The Thai baht, for example, rose 9.72 percent, this year, the Philippine peso 5.08 percent, and the Malaysian ringgit 11.01 percent.
Analysts have warned the central bank to closely watch the influx of the foreign capital, which they said, could pose risks of overheating and run-up of share prices, which could subsequently cause massive outflows and price busts. The foreign fund inflow has resulted in an excessive amount of money supply.Despite this, BI decided Tuesday to keep its benchmark interest rate at a record low of 6.5 percent for the 14th consecutive month. (est)
