Sat, 10 Apr 2010

Indonesia is expected to see further capital inflows this year and the rupiah is likely to continue appreciating, Finance Minister Sri Mulyani Indrawati said on Friday.

Stocks, bonds and the rupiah have extended gains this year, driven by foreign interest in the nation’s assets and a combination of strong economic growth, low inflation, political stability and prospects for further credit-rating upgrades.

“We see the rupiah in a strengthening trend. Capital inflows are likely to continue this year,” Indrawati said. She did not elaborate.

Indonesia’s currency and benchmark stock index have been the region’s best performers in the past 12 months, gaining 25 percent and 94 percent, respectively.

Overseas investors have bought $481 million more of local stocks than they have sold so far this year, helping drive the rupiah to its strongest level in 30 months and the Jakarta Composite Index to a record high.

As of the fourth week of March, foreign holdings of Bank Indonesia Certificates (SBI) totaled Rp 67.9 trillion ($7.46 billion), up from Rp 44.1 trillion last year. Foreign placement in government bonds totaled Rp 131.2 trillion, up from Rp 106.3 trillion at the end of 2009.

Foreign reserves have also risen significantly in the past few months due to the inflows.

Two analysts echoed Sri Mulyani’s view. “The rupiah inflows and the economic fundamentals of the country have been very strong,” said Nizam Idris, a currency strategist with UBS in Singapore. “Indonesia will likely continue to see strong inflows as growth momentum remains strong.”

PT Bank Danamon said in a report that increasing global risk appetite will help bring a massive portfolio inflow that will “result in the tendency of continuing rupiah appreciation.”

But the bank added, “To prevent rapid deterioration of export competitiveness, as the real effective exchange rate has been constantly appreciating, Bank Indonesia will try to reduce the speed of rupiah appreciation by sterilized interventions, like what they have been doing lately.”

“Bank Indonesia will, however, not be persuaded to use capital inflow restrictions or to prohibit non-residents buying SBI. Furthermore, Bank Indonesia thinks that non-resident ownership of SBI can help support the relatively imbalanced on-shore foreign exchange markets.”

Bank Indonesia left its key interest rate at a record-low of 6.5 percent on Tuesday and last month raised its 2010 economic growth forecast to 5.6 percent, from 5.2 percent. Reuters, Bloomberg, JG