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.