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Indonesia: inflows & monetary policy (Tieying Ma, matieying@dbs.com, re-published from same
name report, 13 October 2010)
Foreign inflows have been strong, across financial assets
including bonds, equities and money market instruments
Inflows have not inflated the real economy thus far
• Going forward inflows will continue to rise, due to looser
monetary conditions in the advanced economies and
rising sentiment toward Indonesia. Policymakers will face
growing challenges of managing inflows
• The most likely policy option BI will choose is to reinforce
quantitative measures to absorb liquidity (RRR and OMO).
Raising interest rates will also become unavoidable when
inflation pressures increase
• Accelerating currency appreciation is not expected. And
the authorities’ stance on capital controls seems to be
cautious
Rising inflows
Foreign capital inflows have been strong ever since the
beginning of global recovery early last year, attracted by the
country’s promising economic prospects, a positive
sovereign rating outlook and high yields. From April 2009 to
September 2010, foreign holdings of Indonesian
government bonds increased a cumulative USD 13.5bn. As a
percentage of the total amount of tradable rupiah
government bonds, foreign ownership has risen to a record
high of 28%, up sharply from 15% in Apr09. Meanwhile,
foreign net purchases of equities registered a positive USD
3.6bn over the past 18 months and foreign holdings of
central bank certificates (SBI) increased by USD 4.7bn (Chart
1, 2). In total, foreign inflows into Indonesia’s bond, equity
and SBI markets have reached USD 22bn.
Inflows have not inflated the real economy
Inflows into Indonesia are not that large if compared to the
country’s economic size, however. Measured by the
increases in foreign reserves (USD 32bn since Apr09), net
inflows are equivalent to 4.5% of the country’s annual GDP.
This compares to 13% on average for all the Asian 10
economies, and more than 15% in small economies like
Hong Kong, Singapore, Taiwan and Thailand (Chart 3). This
helps explain why Indonesia’s money supply growth remains
benign at 12-13% YoY, and core inflation stays close to the
lower end of the central bank target of 4-6%. There are no
overheating problems yet in the real economy. The
inflationary phenomenon is chiefly reflected in equity and
bond prices at this moment.
Chart 1: Bond and equity inflowd surging
USD bn
2.5 Govt bond
2.0
JCI
1.5
1.0
0.5
0.0
-0.5
-1.0
-1.5
2010
2008
-2.0 Latest: Sep10
European
global crisis
-2.5
crisis
-3.0
Jan-06 Jan-07 Jan-08 Jan-09 Jan-10
Chart 2: Foreign inflows into SBIs also rebounding
USD bn
3
2
1
-1
-2
-3
-4
-5
-6
Latest: Aug10
2010
European
crisis
Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10
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