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BI shrugs off geopolitical risks, citing strong capital inflows

Heightened geopolitical risks as a result of trade conflicts among major countries and tensions between the United States and China will not affect the flow of foreign funds into Indonesia, Bank Indonesia’s (BI) top official has said

The Jakarta Post
Jakarta
Wed, January 15, 2020

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BI shrugs off geopolitical risks, citing strong capital inflows

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span>Heightened geopolitical risks as a result of trade conflicts among major countries and tensions between the United States and China will not affect the flow of foreign funds into Indonesia, Bank Indonesia’s (BI) top official has said.

BI Governor Perry Warjiyo said geopolitical risks would have little impact on the Indonesian economy, especially the flow of investments, even though global stocks had been under selling pressure following the recent killing of an Iranian general.

He said although share prices in Asian markets declined following the incident, the flow of foreign investment into Indonesia’s debt and equity markets remained high.

The year 2020 is projected to be marked by a series of events that could disrupt world balance. The trade war between the US and China may fragment the global economy; an erosion of alliances and global leadership may lead to increased geopolitical tensions; and climate change might constrain economic growth.

“We do not see geopolitical risks as having a significant impact on our macroeconomic, external stability and the rupiah exchange rate,” Perry told reporters in Jakarta on Friday.

He added that the economic risks from global events, such as the military tension between the US and Iran after the killing of the latter’s high-ranking military general Qassem Soleimani and the United Kingdom’s vote to leave the European Union, which saw an extended deadline for trade-deal resolution, would not be long-term.

Perry instead saw positive developments on the global side, mainly due to an impending trade deal between the US and China after more than 18 months of trade dispute that affected the economies of many countries.

Standard Chartered Bank senior economist Aldian Taloputra agreed with the view of the central bank’s governor, saying that such global events had no long-term economic risks. He said though uncertainties still loomed, trade agreements between the US and China and between the UK and the European Union were on the horizon.

He also believed that the military conflict between the US and Iran was unlikely to escalate into a war.

“The risk appetite has been on the decline, so the currencies and assets of emerging market countries have started to rally again now,” Aldian said.

Perry said that, despite the ongoing global conflicts, foreign capital inflow remained high in the last two weeks, with about Rp 10 trillion (US$728 million) being invested in the government’s short-term bonds and another Rp 1.3 trillion in stocks.

Indonesia’s financial assets, especially the government bonds, remained popular targets of foreign investors, offering more attractive yields than those of similar debt papers overseas, he said.

Perry said the perception of investment risks in Indonesia also improved as indicated by the decline in the risk premium of the credit default swap (CDS).

The CDS is used by global investors to determine the level of risk of investing in a country. A higher CDS means greater investment risk.

The country’s currency exchange rate strengthened to 13,672 per US dollar on Monday, the highest level since April 2018.

Perry attributed the strong rupiah to the country’s strong economic fundamentals as shown by economic growth exceeding 5 percent, a low inflation rate of 3 percent and a currency account deficit staying between 2.5
percent and 3 percent of the country’s GDP in 2019.

He said the increase in the foreign exchange supply due to a rise in export earnings being deposited in Indonesian banks also supported the exchange rate of the rupiah.

Institute for Development of Economics and Finance (Indef) economist Bhima Yudhistira Adhinegara, however, said the government should continue to boost exports and attract foreign tourists to further support the rupiah because “those are the two aspects that will make the rupiah strong in the long-term”.

Throughout last year, the rupiah was relatively stable compared to 2018 as it closed at 13,866 per US dollar, 3.6 percent higher than 14,390 at the end of 2018. A combination of the increase in capital inflows and improvements in the central bank’s monetary policy have supported the currency’s appreciation. (mfp)

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