WB warns RI to better monitor foreign funds

As one of the largest recipients of global portfolio investments, Indonesia has to be extra vigilant of signs that could lead to a rapid reversal of foreign funds from the country’s debt and equity markets, a World Bank senior economist warned.

Enrique Blanco Armas, the World Bank’s senior economist for Indonesia, said Thursday that Indonesia had to quickly respond to any signs of a movement of foreign funds in the country’s debt and equity market.

He said a quick reversal of foreign funds could cause a financial shock in the country.

“In the last few days we saw corrections in Indonesia’s stock market, but compared to the gains in 2010, it’s not a problem. There have been small movements that have been stabilized. I don’t see much reason to be worried,” he said at the World Bank office in Jakarta.

The Indonesian Stock Exchange’s benchmark Jakarta Composite Index gained 46 percent last year, making it among the best performers in the Asia-Pacific region. The index plummeted 9.5 percent in the last several days amid selling pressure from foreign investors. Foreign sales totaled Rp 4.5 trillion in the four-day slump.

Armas’ comments came after the release of the World Bank’s global economic prospectus, in which World Bank director of development prospects Hans Timmer noted that capital inflows were considered to have “reinforced the recovery in most developing countries”.

The Bank’s latest report shows that nine countries — Indonesia, Brazil, China, India, Malaysia, Mexico, South Africa, Thailand and Turkey — received 95 percent of global equity investments, 74 percent of global short-term debt investments and half of global bond investments in 2010.

Indonesia received US$12.5 billion in global portfolio investments in 2010, Bank Indonesia said.

“Indonesia has received relatively high portfolio flows, which are attracted by the higher yield and stronger growth prospects. These flows bring benefits such as lower financing costs, but also raise macroeconomic and prudential policy concerns. A key challenge is converting these inflows into longer term investments,” said Shubham Chaudhuri, the World Bank’s lead economist for Indonesia.

The World Bank forecasts Indonesian economic growth of 6.2 percent this year, lower than the government’s estimates of 6.4 percent. The Bank last month lowered its economic growth forecast for Indonesia’s 2010 full-year growth to 5.9 percent from the previous 6 percent mainly due to domestic supply constraint issues caused by weather anomalies that hurt crop harvests.

Local economists said weather anomalies not only hampered economic growth but caused inflationary pressures.

“Inflation is high or on the rise in many developing countries, notably China, India, Indonesia and Sri Lanka,” the Bank said in the report, citing 6 percent headline inflation forecast for Indonesia in 2011, in line with BI’s 4 to 6 percent inflation target.

Increasing global food prices, which touched a new high last month according to the UN food agency, resulted in an almost 18 percent food price increase in the country where domestic consumption accounts for 60 percent of the economy. (est)