T

he possibility of a United States investment rating downgrade will bring an influx of foreign funds to emerging Indonesia, further complicating things for Indonesia’s policy makers tasked with managing capital flow, central bankers and analysts say.

“We have estimated that the US economic situation will not be as good as expected. The impact in financial markets will be increased inflows because of a weakening US dollar, but this is still manageable for our economy,” Bank Indonesia (BI) deputy governor Hartadi A. Sarwono said.

International rating agency Moody’s Investors Service put the US under review for a credit rating downgrade on Wednesday (Thursday Jakarta time), as talks to raise the US government’s US$14.3 trillion debt limit stalled, adding to concerns that political gridlock would lead to a credit default.

“[Indonesia] needs to be thankful for the fact that, when other countries are under threat, we are moving upward. We still believe that Indonesia will secure an investment grade in the near future,” BI governor Darmin Nasution told reporters at BI headquarters in Jakarta on Thursday.

Indonesian officials expect the country to receive an investment grade this year, as top rating agencies Moody’s, Standard & Poor’s and Fitch Ratings have raised Indonesia’s sovereign credit rating earlier in the year to one notch below investment grade, citing potential for another upgrade in the near future.

“[Rating agencies] normally evaluate in the beginning of the year, but we are trying to negotiate a faster evaluation. We always try to contact, to lobby, the rating agencies,” Darmin said.

“If we are [rated] investment grade, long-term funds — normally pension funds and insurance — from developed nations would come ... so capital inflows will be greater.”

Investors consider Indonesia one of the most attractive emerging economies, offering higher returns for ample global liquidity as developed nations still need near-zero rates to spur growth.

“Investors have limited options for places to invest. They have Indonesia, China and India. China and India are almost at full capacity,” Aviliani, an economist with the Institute for Development of Economics and Finance, told The Jakarta Post.

Aviliani urged policy makers to prepare the market for potential surging inflows because, if a bubble occurs and the funds leave the market all at once, it would destabilize the country’s economy.

“We have a short amount of time for it, as the developed nations will recover. There needs to be improvement or otherwise foreign funds will keep coming, because we don’t levy tax.”

The central bank would use its foreign exchange, which topped $120 billion as of July 14, to mitigate such a sudden reversal if it occurred, officials said. Meanwhile, the government has allocated state budget money to stabilize spiking prices when capital outflows occur in the country’s debt market.

Another government measure to tackle a sudden reversal is utilizing funds from the budget’s accumulated surplus, Finance Minister Agus Martowardojo said.

BI deputy governor Budi Mulya said the central bank estimated that capital inflows to the portfolio market would reach $11 billion this year, compared to $15.7 billion last year, while foreign direct investment would be higher, at $16.7 billion in 2011 compared with $13 billion in 2010.