Reports of capital returning to Indonesia are overblown
Reports of capital returning to Indonesia are overblown
SINGAPORE (Dow Jones): Reports are wildly exaggerated of massive capital flows from ethnic Indonesian Chinese returning to the country as the political situation there stabilizes, analysts said.
Singapore and Indonesian newspapers this week reported as much as US$16 billion could return to Indonesia soon, much of it from Singapore where funds from ethnic Chinese were believed to be parked.
The reverse capital flight was supposed to have a dual effect: bolstering the Indonesian rupiah and depressing the Singapore currency as Singapore dollar deposits are converted into rupiah.
Analysts said while some of the US$30 billion that fled Indonesia two years ago may start to return as the country stabilizes, the flow won't be large enough to affect either currency.
"The intentions are good, and there is some sincerity to what is being said," said Ron Leven, a currency strategist at J.P. Morgan. "But are we going to see US$16 billion sold in the next three weeks? The answer is, 'No.'"
Instead, money will return more slowly, providing long-term support for the rupiah.
"(The flows) will provide topside protection for the currency that didn't used to be there," Leven said. "The chances of the rupiah going back to 8,000 (against the dollar) are pretty remote."
The daily Jakarta Post quoted prominent businessman Sofyan Wanandi saying the Indonesian Chinese business community is optimistic about Indonesia's new leadership under President Abdurrahman Wahid and is preparing to repatriate US$5 billion to US$10 billion.
Analysts said although the new government, which includes the popular Megawati Soekarnoputri as vice president, is promising for the troubled country, a full economic recovery is still far off.
"From a business perspective, the investment climate is still quite uncertain," said Andrew Dermot Fung, a currency strategist at Standard Chartered.
He noted the economic system has been so badly damaged by the Asian financial crisis that few investors want to take a large risk without more evidence of the government's commitment to restoring stability.
"If you had a lot of money stashed away here (in Singapore), how much are you going to bring back?" Fung wondered.
Countering this week's speculation that funds were being repatriated, the rupiah has weakened. Late Thursday, it is quoted at Rp 6,812 against the U.S. dollar compared with Rp 6,735 late Wednesday.
"If there is so much money flowing back to Indonesia, why hasn't the rupiah strengthened?" Fung asked.
Analysts also dismissed the notion that Singapore-dollar deposits are being liquidated and converted into rupiah, saying it's unlikely large amounts of capital transferred out of Indonesia during the crisis were parked in Singapore-dollar deposits.
The island-state's currency also weakened with other regional currencies, they said.
Bank of America noted in a recent report the correlation between the rupiah and Singapore dollar spot rates has been reasonably high over the past two years.
"If one argues that (the) SGD will depreciate when the funds return, surely the reverse would have been true when they fled, but it wasn't," the bank said.
The bank also noted Singapore money supply numbers didn't show a significant rise in Singapore dollar accounts at the time capital flight from Indonesia would have been brought funds into the country.
Some recent news reports have attributed the Singapore dollar's weakness in the last few days to the transfer of these funds, but analysts said it's more likely the Monetary Authority of Singapore stepped into the market to temper the strength of the Singapore dollar, which had risen to 10-month highs.
The MAS is widely believed to have intervened in the currency markets frequently in the last year to preserve export competitiveness.