Indonesia considering capital control ?
The perennial issue of imposing controls on the flow of foreign money returned again this week when a Bank Indonesia deputy governor said the central bank was considering such a move.
On Thursday, the rupiah dropped 1.7 percent — its biggest one-day decline since February — after BI Deputy Governor Hartadi Sarwono was quoted as saying the central bank would study the “pros and cons” of placing controls on SBIs.
But on Friday Hartadi told the Jakarta Globe the comment had been taken out of context because he had also said that “BI remained comfortable with the current policy and was of the view that the inflows and outflows of foreign funds remained manageable and did not cause any sharp fluctuations in the exchange rate.”
Currently, there are no limits on the amount of short-term Bank Indonesia Certificates (SBIs) foreign investors can buy. Critics say this allows large inflows and outflows of foreign “hot money,” creating unhealthy exchange-rate volatility. But others say such money is vital to the economy and that controls would weaken the rupiah over the longer term.
Singapore-based Citigroup economist Johanna Chua said the issue re-emerged after BI senior deputy governor Darmin Nasution revealed on Monday that the central bank had incurred a budgetary loss of Rp 1.9 trillion ($201.4 million) and expected to sustain a deficit next year.
“This was largely due to the rising costs of BI’s monetary operations because of the increasing amount of SBIs it was issuing, especially to foreigners, and the high returns it had to pay to investors,” she said.
Controlling SBI investment was not a new idea, she noted. “It was brought up a few times in 2007, but nothing happened. We think BI is unlikely to implement restrictions anytime soon as such a move could seriously weaken the rupiah,” she said.
“One could argue that foreign purchases of SBIs are speculative and unproductive, and it would be better for the government to find ways to divert this investment into bonds or shares,” Johanna wrote in a note to investors on Thursday. “But Indonesia’s lack of liquidity in the bond and share markets will make this difficult and binding restrictions would prompt capital outflow and weaken the rupiah.”
The perennial issue of imposing controls on the flow of foreign money returned again this week when a Bank Indonesia deputy governor said the central bank was considering such a move.
On Thursday, the rupiah dropped 1.7 percent — its biggest one-day decline since February — after BI Deputy Governor Hartadi Sarwono was quoted as saying the central bank would study the “pros and cons” of placing controls on SBIs.
But on Friday Hartadi told the Jakarta Globe the comment had been taken out of context because he had also said that “BI remained comfortable with the current policy and was of the view that the inflows and outflows of foreign funds remained manageable and did not cause any sharp fluctuations in the exchange rate.”
Currently, there are no limits on the amount of short-term Bank Indonesia Certificates (SBIs) foreign investors can buy. Critics say this allows large inflows and outflows of foreign “hot money,” creating unhealthy exchange-rate volatility. But others say such money is vital to the economy and that controls would weaken the rupiah over the longer term.
Singapore-based Citigroup economist Johanna Chua said the issue re-emerged after BI senior deputy governor Darmin Nasution revealed on Monday that the central bank had incurred a budgetary loss of Rp 1.9 trillion ($201.4 million) and expected to sustain a deficit next year.
“This was largely due to the rising costs of BI’s monetary operations because of the increasing amount of SBIs it was issuing, especially to foreigners, and the high returns it had to pay to investors,” she said.
Controlling SBI investment was not a new idea, she noted. “It was brought up a few times in 2007, but nothing happened. We think BI is unlikely to implement restrictions anytime soon as such a move could seriously weaken the rupiah,” she said.
“One could argue that foreign purchases of SBIs are speculative and unproductive, and it would be better for the government to find ways to divert this investment into bonds or shares,” Johanna wrote in a note to investors on Thursday. “But Indonesia’s lack of liquidity in the bond and share markets will make this difficult and binding restrictions would prompt capital outflow and weaken the rupiah.”
