Juda Agung. Department of Economic Research and Monetary Policy BANK INDONESIA

Transcription

1 Juda Agung Department of Economic Research and Monetary Policy BANK INDONESIA

2 1 Roadmap: Recent Capital Inflows Benefits and Challenges Policy Responses Final Remarks

3 Recent Capital Inflows 2 Indonesia has attracted large capital inflows since the recoveryof global financial crisis, reaching USD26 billions in In 2011, we expect the total inflows is higher Recent pick up in private inflows are primarily in portfolio investments. FDI inflows increases as well, driven by accelerated domestic demand for investments. Capital Inflows to Indonesia (2) (4) (6) (8) $bn FDI (net) FPI (net) OI (nett) CFA I II III IV I II III IV I II III IV I

4 Characteristics of Recent Capital Inflows 3 The composition of inflows is different from previous episodes... Composition of portfolio investments has been skewed toward portfolio debt assets, particularly government bonds. Portfolio inflows that are intermediated by banks are insignificant; unlike 1990s inflows. Regulation on banks are more stringent and slow recovery of banks in advanced countries. Foreign holdings of gov bonds Portfolio Investments % Indonesia Japan Rep. of Korea Malaysia Thailand Indo USD Mn IDR/USD 8,500 9,000 9, Malay 0 10, Korea Thai ,500 11,000 11, Japan Stock SBN SBI IDR/USD Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 12,000

5 Cyclical and Structural Factors 4 The recent inflows to EMs, including Indonesia, reflects both cyclical and structural factors CYCLICAL GLOBAL : PUSH FACTORS Multispeed global recovery Widening yields and growth differentials Global Excess Liquidity STRUCTURAL FACTORS Debt problems in advanced countries Better prospect in EMs eg.prospect of investment grade in Indonesia

6 Cyclical Factors. 5 Cyclical factors (widening yield differentials and growth differentials) remain important factors in the short run.. Covered Interest Rate Parity World GDP Path (CF July 2011) % Indonesia Philippinnes Malaysia Korea % yoy IMF GDP Forcst Juni-11 [2011 ]: 4.3% yoy -Adv. Econ. : 2.2% yoy - Devl Countries : 6.6% yoy Feb-07 Apr-07 Jun-07 Aug-07 Oct-07 Dec-07 Feb-08 Apr-08 Jun-08 Aug-08 Oct-08 Dec-08 Feb-09 Apr-09 Jun-09 Aug-09 Oct-09 Dec-09 Feb-10 Apr-10 Jun-10 Aug-10 Oct-10 Dec-10 Feb-11 Apr-11 Jun Devl. Countries World Adv. Economies Source: IMF, Consensus Forecast - (staff estimates) Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul

7 Structural Factors Structural factors suggest that capital flows to EMs are likely sustained over the long term albeith with periods of heightened volatilities 6 Debt Problems and Ratings of AEs Indonesian Rating by S & P BBB BBB- BBB- BB+ B BB B- CCC+ INVESTMENTGRADE B- CCC+ CCC+ CCC+ CCC B- B CCC+ BB+ (positive) BB- BB B+ SD SD Dec-92 Apr-95 Oct-97 Dec-97 Jan-98 Jan-98 Mar-98 May-98 Mar-99 Mar-99 Sep-99 Apr-00 Oct-00 May-01 Nov-01 Apr-02 Sep-02 May-03 Oct-03 Dec-04 Jul-06 Mar-10 Apr-11 Projected Capital Inflows to EM (IIF) (billions of USD) Jan Jun Jan Jun Jan Jun Jan Jun f 2012f Total EM Private inflows, net Equity Investment, net Direct Investment Portfolio Investment Private Creditors, Net Region Emerging Asia Equity Investment, net Direct Investment Portfolio Investment Private Creditors, Net

8 Benefits of Capital Inflows 7 Capital inflows have positive impacts Rupiah appreciation, following capital inflows, has a positive impact on curbing imported inflation. It also facilitates the effort to enlarge economic capacity by cheaper raw material and capital goods import that are required to enhance investment. Strong inflows substantially reduce the government bond yield that reduce costs of capital. Rupiah Development Governemnet Bond Yield IDR/USD Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 5-Apr 8-Apr 13-Apr 18-Apr 21-Apr 27-Apr 2-May 5-May 10-May 13-May 19-May 24-May 27-May 1-Jun 7-Jun 10-Jun 15-Jun 20-Jun 23-Jun 28-Jun

9 Challenge: Exchange Rate Appreciation Capital inflows create upward pressures on Rupiah, leading to concerns about declining export competitiveness. The capital inflows put pressures on the Rupiah appreciation, reaching at 14,9% (pt-p) in 2009 and 4,6% in Risks of exchange rate overshooting has been managed by Bank Indonesia through foreign exchange intervention in the market. Monthly Portfolio Flows Regional REER 8 USD Mn IDR/USD , , , Stock SBN SBI IDR/USD 10,000 10,500 11,000 11,500 12, Indonesia Filipina Korea Malaysia Thailand Indeks Mar 06 -Apr 07 = 100 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Jan-06 Mar-06 May-06 Jul-06 Sep-06 Nov-06 Jan-07 Mar-07 May-07 Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11

10 Challenge: Asset Price Bubble 9 Portfolio inflows to equity are also large, raising the stock market prices. There has been some indications of over-valuation with a tendency of self-correction. The yield on government bonds decelerated sharply as well, now less than 6% for short term maturity and about 7% for 10 year bond, facilitates less costly financing for fiscal operations. Equity Prices: Actual vs Fundamental Yield on 10 Year Government Bonds

11 Challenge: Sudden Reversal 10 Dominant inflows in portfolio investment raise the risk of sudden capital reversal Portfolio investment, especially government bonds and central bank bill, are more vulnerable to change in market sentiment. By the end of June 2011, the shares of foreign holding in SBI (Central Bank Bills) and government bonds reached, respectively, 33% of total SBI and 33% of total government bonds. Those figures are the highest among countries in the region. Thus, it has potential risk of sudden capital reversal, which in turn could trigger destabilizing financial market. Foreign Holding on Goverment Bond Foreign Holding on SBI % Indonesia Japan Rep. of Korea Malaysia Thailand Indo Malay % Korea Thai Japan BoT Bill SBI BoK Bill

12 Challenges: Macro Instability 11 Capital inflows can induce macroeconomic instability through liquidity Current global excess liquidity in developed markets (e.g. US &UK) lead to the influx of capital inflows to EMEs. Large capital inflows creates high excess liquidity in the banking sector/economy. The trend in higher excess liquidity is expected to continue in 2012: Monetary aggregate and credit could potentially grow higher thanliquidity needed in the economy. Hence, it can put pressures on inflation, particularly core inflation In addition, excess liquidity could potentially reduce the effectiveness of monetary policy. (Excess Liquidity/Deposits) (%) % Banking Liquidity Ratio Jan 95 -Agt 98: 4,6 % BankingLiquidity Ratio = (Total OMO + Excess Reserve + Excess CIV) / DPK Sep 98 -Jun 2011: 16% Jan-95 Oct-95 Jul-96 Apr-97 Jan-98 Oct-98 Jul-99 Apr-00 Jan-01 Oct-01 Jul-02 Apr-03 Jan-04 Oct-04 Jul-05 Apr-06 Jan-07 Oct-07 Jul-08 Apr-09 Jan-10 Oct-10

13 Framework of Policy Responses 12 Managing Policy Trilemma Managed Capital Flows Goal: alleviate capital flow volatility. Macroprudential capital flows (e.g. minimum holding period, foreign exchange reserve requirement). Capital Control (e.g. limiting private loans) Managed Exchange Rate Goal: reduce exchange rate volatility. Seek an optimal balance between providing space for appreciation; and Foreign exchange intervention and accumulating foreign exchange reserves as a form of self-insurance. Monetary and macroprudential policy Goal: maintaining monetary policy independence. Macroprudential to manage liquidity and prevent financial sector risks.

14 Policy Responses ses Policy Mix Multi challenges needs policy mix to cope with the impossible trinity and to safeguard monetary and financial system stability, consisting conventional macroeconomic responses and macroprudential measures: 1. Conventional Macroeconomic Policy Responses. Prudent macroeconomic policies(monetary and fiscal policies) as the first line of defence. Exchange rate flexibility.rupiah appreciation to take some burden of adjustments to help achieve price stability and consistent with overall macroeconomic outlook, without inducing risks of overshooting. Foreign exchange reserve accumulation for self-insurance against risks of sudden and large capital reversals. 2. Macro Prudential Policy Responses To mitigate the complications for central bank monetary operation. Policy tools: Raise reserve requirements, lengthening interval of auction, offer longer term SBI from 1 and 3 to 9 months, introducing 1 month term deposits. To limit volatilities of flows. Policy tools: minimum holding periods of SBIs To limit vulnerabilities on bank balance sheets and reduce incentives for banks to intermediate short term flows. Policy tools: raise FX Reserve requirement on FX accounts, reinstating limit of offshore short term 1 3

15 BI s s Policy Mix Instruments Policy Rationale Increasing BI rate by 25 bps to 6,75% in February 2011 and hold it until the last meeting board (July 2011). 1.Interest rate policy 2. Exchange rate policy 3. Macroprudential on capital infows Implementing a consistent flexible Exchange Rate (with stable volatility), in line with macroeconomic dev. & movement of other Asian currencies. a. Imposing 1 Month Minimum Holding Period (OMHP) on BI bills (June, 2010) and extend to 6 Months Holding Period (May 2011) b. Introducing 1 month Term Deposit (June 2010). c. Increasing FX Reserve Requirement from 1% to 5% March 1st, 2011, to 8% June 1st, To keep inflation on track with inflation targets, 5% ±1% (2011)& 4,5% ±1% (2012), while remaining conducive to safe guard financial stability & promote economic growth To stabilize exchange rate, help reduce inflationary pressures, particularly from imported inflation, and not put negative impacts on export performance. To put sand in the wheels on short-term and speculative capital inflows, and mitigate risks of sudden reversals. To lock up domestic liquidity into longer term, and limitthe supply BI bills in the market. To enhance bank s FX management liquidity in response to increasing FX exposure due to capital inflows, while supporting monetary operations in managing liquidity and stabilizing exchange rate.

16 BI s s Policy Mix Instrument Policy Rationale 4.Macroprudential on capital infows a. Reinstating limit offshore short term borrowing of banks to 30% capital (end Jan 2011),with 3 months transition period. b. Revocating BI direct FX supply to domestic corporate To limit capital inflows to financial assets and encourage a shift to longer term offshore borrowing. To bring domestic FX liquidity back to normal and further deepen FX market liquidity. 5.Strengthen monetary operation and macroprudential on financial system stability a. Lengthening interval of auction(from weekly to monthly) and offer longer BI Bills maturity from 1 and 3 month to 9 month since August b. IncreasingRupiah reserve requirement from 5% to 8%, effective Nov c. Linking Reserve requirement to Loan to Deposit Ratio (78-100), effective March 1 st, To enhance the effectiveness of domestic liquidity management, including from capital inflows, by locking up to longer term and in the same time help develop domestic financial markets. To absorb domestic liquidity and enhance liquidity management of the banks, without exerting negative impact on lendings that are needed to stimulate growth. A prudential measure to enhance role of banking intermediation to support economic growth, while maintaining prudent banking operation.

17 Final Remarks 1 6 The resurgence of capital inflows to Indonesia is driven by cyclical as well as structural factors. A more pragmatic policy-mix has so far been successful to manage the inflows, particularly to reduce the volatilities and risks on financial stability. In the longer run, however, efforts should be made to reap the benefits of inflows, given that the some structural capital flows are likely to be sustained. Policy coordination among authorities are deemed necessary to deal with the inflows, including the crisis management protocol.

18 17