With the nation’s benchmark index hitting an all-time high last week as investors race to capitalize on Indonesia’s strong economic potential, it may be a good time to pause and take stock of the situation. Before exuberance strays to the realm of the irrational, a little prudence is called for.
The prospect of limiting inflows of foreign capital re-emerged recently when a Bank Indonesia official warned of a domestic stock bubble in a market dominated by overseas buyers. In November, the central bank conducted a study on the possibility of limiting foreign ownership of local debt, especially BI Certificates (SBI), in which the sudden reversal of ownership pattern was blamed for currency volatility.
The market responded to the warnings with declines in securities and the currency, signifying the terror the words “capital controls” strike with investors.
Bank Indonesia’s concerns are understandable. A sudden reversal in liquidity and the bursting of an asset bubble would deal a serious blow to the financial market’s stability as well as to the economy in general. However, rather than capital controls, the solution lies in maintaining a prudent monetary and fiscal policy as well as measures aimed at increasing the market’s liquidity.
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