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Thursday November 19, 2009

Controlling foreign ownership of debt mention sends Indon rupiah down


Indonesia plays down curb threat

JAKARTA: Indonesia’s central bank yesterday played down the immediate threat of curbs on foreign ownership of short-term debt after its earlier mention of controls hit the rupiah currency.

Deputy governor Hartadi Sarwono said late on Tuesday the central bank was considering such controls to curb hot money flows, possibly following the path of Brazil and Taiwan. The remarks pushed the rupiah down 0.5% against the dollar in early Wednesday trade.

But Sarwono later told Reuters possible limits on foreign investments in short-term SBI debt were just one of the options the central bank was studying and that so far rupiah moves linked to money flows were manageable.

“As a precautionary measure, of course BI (Bank Indonesia) is studying the possibility of limiting foreign ownership in SBIs, but it doesn’t necessarily mean that we will implement it,” Sarwono said by mobile phone text message.

Taiwan earlier this month imposed capital controls banning foreign funds from investing in time deposits, a measure that appeared to be aimed at deterring currency speculation, while Brazil last month brought in a tax on capital inflows.

Those moves coincide with a wider debate over whether the weakness of the US dollar and the US Federal Reserve’s easy money policy is helping to fuel fresh asset bubbles as investors seek higher-yielding assets, particularly in emerging markets.

Foreign investor interest in Southeast Asia’s biggest economy has picked up this year thanks to a combination of political stability, economic growth, falling inflation, and lower interest rates. The rupiah has gained about 17% against the dollar so far this year as Asia’s best performing currency, while stocks are up 80%, also among the regions’ top performers.

Some analysts said the central bank seemed keen to shift flows from short-term debt to longer maturities, but Robert Prior-Wandesforde, economist at HSBC in Singapore, said the authorities faced a delicate balancing act.

“Obviously they are worried about the big inflows of capital and the potential for even more rapid outflows as it can reverse more quickly,” he said. “The danger is the message it sends, and if you send the wrong message to foreign investors it takes a long time to win back confidence.”

The authorities seem worried about the billions of dollars being parked in SBIs to exploit the yield differences.

For instance, a foreigner with access to funds at Libor can earn up to 350 basis points by buying one-month SBIs yielding nearly 6.5% and using the non-deliverable forward market to swap dollars into rupiah.

“These flows are pretty big,” said a trader in Singapore, estimating such arbitrage-seeking short-term flows at US$5bil. “There might be some shift from these flows to long end, but not a lot.”

As of Nov 13, foreigners held around 47 trillion rupiah (US$5.01bil) worth of SBIs, or about a fifth of the total of 240 trillion rupiah, a central bank source said. Foreign inflows boosted Indonesia’s capital account, which swung to a US$3bil surplus in the third quarter from a deficit of US$2.2bil in the second quarter.

Citibank economist Johanna Chua said that a move to limit foreign ownership of SBIs would be very negative for the rupiah and was unlikely to come into effect soon.

“One could argue that foreign funds purchasing SBIs are speculative and unproductive, and that it would be far better for the government to find ways to divert foreign funds into other IDR (rupiah) instruments, such as IDR government and corporate bonds or shares,” she said in her note to investors.

“On the other hand, Indonesia’s inadequate financial deepening – lack of liquidity in bonds and share market – will make it difficult to significantly divert foreign funds out of SBIs into alternative assets. Thus, binding restrictions on SBIs would prompt capital outflow and weaken IDR.” — Reuters


For Another perspective from the Jakarta Post, a partner of Asia News Network, click here


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