Indonesia Studying Options To Stabilize Debt Market

Jakarta Globe, Faisal Maliki Baskoro, Francezka Nangoy & Dow Jones | November 14, 2010

Jakarta. The government is studying setting up a fund to stabilize bond prices in case foreign investors suddenly start dumping Indonesian assets, the latest in a series of efforts to manage the massive inflow of funds from abroad.

Indonesia’s red-hot bond market has spurred worry over
a sudden withdrawal of capital from foreign investors.
Suggested solutions include a fund for bond purchases
and more investment instruments. (AFP Photo)

“They have that in South Korea where in the case of a reversal, authorities can buy back bonds to stabilize them. We’re still studying it,” Perry Warjiyo, director for monetary policy at Bank Indonesia, said on Friday.

“Bank Indonesia and the Finance Ministry will hold a meeting [this] week to better coordinate our steps in tackling capital inflows,” he added. Perry did not return calls seeking comment.

Indonesia, along with other emerging economies, has seen a surge of inflows into securities such as stocks and bonds as investors from slower-growing countries seek higher yields. The worry is that financial markets would be thrown into chaos should those inflows suddenly reverse. Indonesia, Brazil and other emerging markets are introducing capital curbs to avert financial instability from investors seeking higher-yielding alternatives to near-zero interest rates in the United States, Japan and the eurozone, Bloomberg reported last week.

Finance Minister Sri Mulyani Indrawati, now a managing director at the World Bank, said last week that Asian economies may need to consider capital controls to ease the risk of hot money flying out.

The advice comes after the US Federal Reserve announced it would try to boost the US economy with plans to buy $600 billion in long-term Treasury bonds as a part of efforts known as quantitative easing.

Indonesia’s central bank suspended the sale of its three-month debt papers, known as Bank Indonesia Certificates (SBIs), and started offering a three-month non-tradable term deposit as part of its efforts to reduce risks connected to foreign inflows.

Bank Indonesia officials have also said it was considering extending the mandatory one-month holding period for SBIs if inflows intensify to further keep sudden reversals in check.

Indonesian lenders have started to set aside 8 percent of their deposits — up from the original BI requirement of 5 percent — as primary reserves have been absorbing excess liquidity from the market since early November.

Still, economists are expressing mixed responses over the prospect of such a move by finance authorities.

“I don’t think Bank Indonesia needs to create a special fund for [emergency bond stabilization], because the costs will be huge if it’s not being used. It’s better if they just expand their open market operations onto the bond market,” Purbaya Yudhi Sadewa, chief economist at state brokerage Danareksa Sekuritas, said over the weekend.

Bank Indonesia’s open market operations focus on reducing volatility in the rupiah.

“What Bank Indonesia and the Finance Ministry need to do now is to manage the hot money by deepening and diversifying the market,” said Juniman, chief economist at Bank Internasional Indonesia, referring to offering more varied financial instruments.

Foreign holdings of Indonesian bonds rose 2 percent to Rp 195.7 trillion ($21.91 billion) on Nov. 11 from Rp 191.99 at the end of October, data from the Finance Ministry’s debt management office showed. State foreign exchange reserves increased to $91.9 billion at the end of October from $86.5 billion the previous month, according to Bank Indonesia data.

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