T

he so-called '€œhot money'€ is making a comeback, this time raising a big question mark on whether the foreign inflows can bring positive spillovers to Indonesia, or, on the contrary, are poised to destabilize the economy as they did during last year'€™s capital flight.

Recently, Indonesia'€™s stocks, bonds and currency market have been among the best performers in Asia this month after significant improvement in the country'€™s macroeconomic indicators drew foreign inflows.  

The country'€™s monthly trade surplus widened to a 20-month high of US$777 million in November, while annual inflation '€” previously feared to hit double-digit levels after the fuel price hike implemented in June '€” stood at a relatively benign level of 8.4 percent throughout last year.

Since the data was released earlier this month, foreign ownership in government bonds increased by
Rp 6 trillion to stand at Rp 329.8 trillion ($27 billion) as of Jan. 22, according to data from the Finance Ministry'€™s debt management office.

Meanwhile, overseas funds bought $90 million more local stocks than they sold last week, the exchange rate data show, as reported by Bloomberg.

The Jakarta Composite Index (JCI) rose 3.9 percent this month to touch 4437.34 by the end of Friday, among the strongest performances in the region.

French-based Société Générale has predicted foreign inflows to Indonesia to remain strong in the medium run, helping push up the rupiah to touch 10,250 per dollar this year, as it argued that investors apparently were too bearish to the country in 2013 and '€œoverpriced'€ its macro-fundamental risks.

However, policymakers have expressed wariness on the strong influx of hot money, especially as these funds are known as easy-come, easy-go investments that could destabilize financial markets.

'€œThe hot money is something that we should be vigilant about,'€ Bank Indonesia (BI) spokesperson Peter Jacobs said recently. '€œWith some issues such as the tapering of US quantitative easing still spooking investors, the money could exit the country at any given moment.'€

In 2013, Indonesia'€™s bonds and stocks took a beating after the hot money parked here was abruptly pulled out, as fund managers were worried by the prospect of tighter global liquidity due to the possibility that the US Federal Reserve would scale down its quantitative easing policy.

Analysts have warned that the situation might be repeated this year, with potential capital outflows being able to occur if Indonesia'€™s election this year generates unexpected outcomes, as well as if the Fed is not careful in pulling back its monetary stimulus.

'€œRecently there have been foreign outflows from our neighbor Thailand due to political uncertainty there, so probably the funds are only being parked here temporarily,'€ argued Herdi Ranu Wibowo, the head of debt capital market with BCA Sekuritas in Jakarta.

'€œWhether these inflows are sustainable [for the long run] will depend on improvements in the current-account deficit, which have become the major worry among investors,'€ he added.

Despite the negative threats it poses to the economy, the hot money may be something that Indonesia needs to strengthen its capital account and, ultimately, the country'€™s balance of payments, which have always been under heavy pressure due to the continuous deficits in the current account.

The Indonesian central bank had taken measures in its bid to win back the hot money that the country lost last year.

A few months ago, BI shortened the minimum holding period for its SBI debt papers to 1 month from previously 6 months, to attract short-term foreign inflows to the monetary instrument.

Last year, BI also raised its key interest rate to a cumulative 175 basis points to 7.5 percent '€” the highest in four years, with the higher yield of rupiah assets so far proving effective in luring global fund managers to Indonesia.

The robust foreign inflows occurring recently was a sign that fund managers '€œwant to take more risk'€ by buying rupiah assets, the prices of which are seen as already undervalued among investors, according to Tim Condon, the head of Asian research with the Dutch-based ING Group.

 '€œThe priority for the central bank is to deter hot money in the first place. To do that, interest rates have to fall when the inflow becomes too large,'€ Condon cautioned.