Bank Indonesia Optimistic on Foreign Capital

Tax pardon to maintain inflows despite Fed rate hike

By Prima Wirayani/The Jakarta Post
Friday, November 4, 2016

Bank Indonesia (BI) has expressed optimism that foreign capital will continue to flow into the financial market until the year-end despite stronger signals from the US Federal Reserve for a Fed funds rate hike in December.

A BI board of governors meeting earlier anticipated the Fed's decision and expected to see the US benchmark interest rate increase in December followed by two more rises next year, as well as three more upsurges in 2018, BI deputy governor Perry Warjiyo said.

"We don't only recognize the Fed's decision, but also its communication tone, which has been less hawkish lately," he told journalists in Jakarta on Thursday.

Aside from monitoring portfolio and foreign direct investments, the Indonesian central bank will also pay attention to asset repatriation from the first round of the tax amnesty which, according to Perry, will lead to capital inflows at the end of the year amid the challenging global economic situation.

The government has given a deadline until year-end to repatriate assets for those who participated in the first phase of the program, from July to September. Some Rp 43 trillion of repatriated assets are set to enter the country until the end of December.

Perry acknowledged that uncertainties in the global market, especially in the US, had increased as the US presidential election approached. However, Indonesia so far has yet to feel any effects from it.

"Portfolio [investments] keep flowing in, the value is relatively stable and good enough," he said, adding that as much as Rp 157 trillion (US$12 billion) of capital inflows had entered the country as of last week.

The rupiah has strengthened by more than 5 percent against the greenback so far this year. It closed the day at Rp 13,075 per US dollar on Thursday, weakened by 0.14 percent from the previous close, Bloomberg data show.

Fed policy makers left interest rates unchanged in November while saying the argument for higher borrowing costs strengthened further amid accelerating inflation, reinforcing expectations for a hike next month, Bloomberg reported.

“The committee judges that the case for an increase in the federal funds rate has continued to strengthen but decided, for the time being, to wait for some further evidence of continued progress toward its objectives,” the Federal Open Market Committee said in a statement Wednesday following a twoday meeting in Washington.

Deutsche Bank chief economist Taimur Baig said emerging markets should not be too concerned over the Fed's decision, asserting that domestic consideration of an economy was more important than the global one.

"I think the market has been closely following the Fed. The market is not surprised by the Fed's decision this morning, the market is not surprised that the hike is in December. It's already priced in," he said during a media discussion in Jakarta on Thursday.

The Jakarta Composite Index (JCI), the benchmark of the Indonesia Stock Exchange (IDX), weakened by 1.41 percent to close the day on Thursday at 5,329. The index outperforms its peers by gaining around 18 percent of its value so far this year.

The drop in the JCI was not caused by concerns over the Fed’s decision as its effects were likely minimal to Indonesia, Asjaya Indosurya Securities analyst William Surya Wijaya said. "Investors are in a wait-and-see mode as many important events will take place next week, such as the US GDP [gross domestic products] result and the presidential election," he said by phone.

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