Country Report Indonesia January 2011

Economic policy: New measures are announced to manage capital flows

While leaving interest rates on hold, BI has announced new measures aimed at managing the risk of excessive growth in the money supply in the face of continued inflows of foreign capital. Among other measures, BI said that it would increase commercial banks' minimum US dollar reserve requirement to 5% of total deposits from March 1st and to 8% from June 1st, from the current level of 1%, in a move that is expected to absorb around US$3bn in liquidity. Separately, BI revealed that foreigners channelled US$13bn into Indonesia's financial markets in 2010. Of that total, US$9.6bn was invested in government bonds, taking foreign holdings of bonds to nearly 30% of the total stock. A further US$2.3bn was invested in the stockmarket, taking foreign holdings in the Indonesia Stock Exchange to around 60%. The remaining funds were invested promissory notes, with foreign holdings accounting for around 30% of total issuance. Although this build up in holdings reflects a promising outlook for the Indonesian economy, it also leaves the country highly vulnerable to any reversal in investor sentiment and the withdrawal of large volumes of foreign capital.

© 2011 The Economist lntelligence Unit Ltd. All rights reserved
Whilst every effort has been taken to verify the accuracy of this information, The Economist lntelligence Unit Ltd. cannot accept any responsibility or liability for reliance by any person on this information
IMPRINT