HIGH CAPITAL INFLOWS IN 2010 MAY WREAK HAVOC

17-DEC-10  NAT  JKT

By Andi Abdussalam

Jakarta, Dec 17 (ANTARA) - Indonesia has enjoyed high foreign capital inflows in 2010 and it is still expected to have more until the middle of 2011.          Yet, while they will provide opportunities, the inflows will also pose risks for Indonesia in their management.          "If the growing capital inflows are not managed properly they could wreak havoc on the national economy," Hartadi A Sarwono, deputy governor of Bank Indonesia (BI/the central bank) said at a seminar on the 2011 economic outlook  on Wednesday.           Many countries during the recent G-20 summit were worried about a possible reversal in the capital inflows which could happen anytime. Indonesia, along with other emerging economies had once discussed the possibility of forming a global financial safety net to address systemic crisis.          According to Halim Alamsyah, another BI deputy governor, capital inflows normally would benefit the developing countries' economies but the inflows of short-term capital this time could disrupt economic management.          On Thursday, the World in its quarterly report asked Indonesia to focus on strengthening capital inflows that came into Indonesia in 2010 and on the impact of rising commodity prices.          "The challenge is to maximize the opportunities presented by capital inflows and rising commodity prices for Indonesia while managing their risks," Shubham Chaudhuri, the World Bank's lead economist for Indonesia, said the report.          He said that capital inflows, particularly inflows into portfolio investment, are attracted by Indonesia's higher yields, stronger growth prospects and improving creditworthiness relative to higher-income economies. "These include, for example, enhancing incentives for foreign direct investment to help to shift inflows toward longer-term investments," he said.          According to the World Bank, the flows bring benefits, such as lowering financing costs, but they can also raise macroeconomic and prudential policy concerns.          As regards, BI called on the government to set aside funds as part of financial safety net to anticipate mass capital outflows. "The government must form funds to anticipate a sudden reversal of foreign capital that may spark a crisis,"   Hartadi A. Sarwono  said.         The financial safety net was urgently needed to shore up investors` confidence in the capital market. Preventing a sudden reversal of foreign capital is one of the approaches the government must prepare to face the growing capital inflows in recent months, he said.          The other approaches were adopting more cautious macro policy, reducing the frequency of Bank Indonesia Certificate (SBI) auctions, extending the maturity of SBI and switching funds put in SBI to time deposits, he said.          Yet he could not predict the amount of funds needed to form the financial safety net.          Actually, BI had discussed the idea of forming such funds with the government.  But, the idea had yet to be realized.          In the face of possible inflow reversal, the government did not seem be be worried. Thus, it will continue to let foreign capital to flow in. Capital inflows are needed to stimulate the country's economy.          "We will never limit the amounts of incoming foreign capital. It should be allowed to flow in freely. The important thing is that it is absorbed and used efficiently and effectively. After all, Indonesia's economic fundamentals are strong," Coordinating Minister for Economic Affairs Hatta Rajasa said.          Therefore, Indonesia hopes the current foreign capital inflows could be used to help the country's economy. "The government welcomes the capital inflow into Indonesia and we will direct them to productive sectors to help move the economy," Finance Minister Agus Martowardoyo said meanwhile.          Minister Agus predicted foreign capital would continue to come to Indonesia until 2011 and the government and BI (the central bank) continued coordinating and preparing a protocol for dealing with a financial crisis.          "We believe the current conditions would continue until in the middle of 2011. We (the government and BI) have already taken a lot of measures and also have already implemented the financial crisis protocol and would keep coordinating and so we keep alert," he said.          In fact,  the central bank has also assured that Indonesia should not worry too much about a sudden reversal of capital inflow because it has enough foreign exchange (forex) reserves.          The country's forex reserves which at present stood at US$91.8 billion could reduce risks of sudden foreign capital outflow.  "The amount of the country's forex reserves has unexpectedly reached US$91 billion, exceeding that of last year which stood at US$66 billion, and this provides confidence for the monetary authorities in the face of possible sudden reversal to the capital inflow," BI Deputy Governor Budi Mulya said.          He said that BI and the government would do their best to optimize the benefit of foreign capital inflow because it would create efficiency and generate manufacturing industry and investment activities.          "Capital inflow could meet our expectation regarding inflation and it would provide positive contribution. We see that capital inflow would not disturb competitiveness because our competitor countries also experience the same thing. If we calculate the level of rupiah appreciation, it would not be the same as that of other countries," he said.          He hoped investment of capital inflow in state bonds or in the stock market would provide a positive impact on the real sector, and would not merely be temporarily parked in the money market.     (T.A014/A/H-NG/A/O001) 17-12-2010 11:20: