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Indonesia remains attractive to foreign investors, says BI

Publication Date : 05-02-2014

 

Despite tighter global liquidity this year, Bank Indonesia (BI) remains optimistic that the country will still attract foreign inflows, as fund managers will notice the latest improvements in the country’s macroeconomic indicators, notably the narrowing current-account deficit.

“There’s one important variable that determines the decision that investors make when they weigh their investment preferences within one country and others: the current-account deficit,” BI’s director of monetary policy, Doddy Zulverdi, told reporters on Tuesday.

Increased optimism in Indonesia’s current-account deficit materialized after it was reported that the country posted a US$1.5 billion trade surplus in December after three consecutive months of trade surplus.

Indonesia is likely to sustain its trade surplus this year, a situation that will ease pressure on the current-account deficit, which may narrow to 1.1 per cent of the gross domestic product (GDP) this year compared to around 3.1 per cent last year, according to a report from Dutch-based bank ING Group.

On Tuesday, concerns over lagging economic recovery in the US have led to large amounts of funds being pulled out of Asian assets. The Jakarta Composite Index (JCI) fell 0.8 per cent to touch 4.352.26, while indexes in Malaysia, Thailand and the Philippines fell by more than 1 per cent. Japan’s Nikkei and Hong Kong’s Hang Seng led losses on Wednesday, each dropping 4.2 per cent and 2.9 per cent, respectively.

The share of exchange-traded funds (ETF) of MSCI Emerging Markets, which tracks assets of emerging economies into one basket of investment, fell 2.83 per cent to $37.10, the lowest level since June, as of 6:45 p.m. Jakarta time, according to Bloomberg.

Meanwhile, Finance Minister Chatib Basri said that the government was also preparing a new fiscal tool to curb outflows of foreign funds from the country, especially fund repatriation of foreign joint ventures.

Chatib said on Tuesday that the government’s highly-anticipated tax incentives for firms that reinvested their earnings in Indonesia instead of repatriating them overseas, would be issued within the next one or two months.

“We are still studying the most effective mechanism, whether [the incentives] could come in the form of a dividend tax or tax allowances,” the minister said in a recent interview.

The issue of earning repatriation has become a major problem, destabilising the economy every year. By the middle and the end of each year, many firms operating here normally boost their dollar purchases to repatriate earnings to their headquarters overseas.

Such a situation leads to a sudden dollar-demand surge that exerts pressure on the rupiah, in addition to prompting capital flight, which adds pressure to the capital account - an important variable of the balance of payments, an indicator of a country’s financial health.

The government would focus on strengthening the capital account this year, Chatib said on Tuesday during his keynote speech at a seminar in Jakarta.

According to the minister, the capital account issue would be important as competition to lure inflows would become fiercer amid a tight liquidity environment in 2014, especially as many central banks in emerging economies had hiked interest rates to make their respective assets more attractive.

 

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