By Kevin Brown in Singapore and Toni O’Loughlin in Jakarta
Emerging Asia’s central banks are imposing fresh administrative controls on local banks as fears rise of volatile currency movements and asset price bubbles caused by the knock-on effects of loose US monetary policy.
In the latest sign of growing nervousness about the scale of financial inflows from the west, Indonesia announced more than 20 technical measures designed to minimise inflationary pressures and the risk of a sudden reversal of fund flows.
The announcement followed moves by Taiwan to tighten curbs on exchange rate derivatives and rising expectations in Seoul that South Korea will significantly reduce limits on banks’ holdings of exchange derivatives in January.
Thailand imposed a 15 per cent withholding tax on capital gains and interest payments relating to government and state-owned company bonds, signalling that it was prepared to take tough measures to curb inflows of “hot money”.
Economists said the latest round of administrative measures reflected strains caused by the gap between low western interest rates and rising rates in Asia, compounded by the latest quantitative easing in the US.
However, most played down the risk of an accelerated move towards capital controls such as the prohibition of equity investments or foreign exchange transactions, or the imposition of minimum maturity requirements.
Eric Sugandi, at Standard Chartered in Singapore, said the Indonesian measures, announced by the central bank on Wednesday, should not be regarded as capital controls and were unlikely to be followed by tougher measures.
Mr Sugandi said Bank Indonesia was aiming to mitigate the volatility of short-term capital flows but its relatively modest measures might backfire by signalling to the market that it was prepared to tolerate further appreciation of the rupiah.
The currency rose to a one-month high on Thursday, climbing 0.3 per cent to 8,973 to the US dollar, according to data compiled by Bloomberg.
Other economists said the central bank’s main objective was to reduce upward pressure on asset prices, which have been rising fast. The benchmark Jakarta Composite Index has risen 47 per cent in the past year and is among the top 10 performing equity indices, along with Sri Lanka, Peru, Thailand and the Philippines.
“The country is facing excess liquidity and if they allow the liquidity to keep coming it will create a bubble in asset prices,” said Mirza Adityaswara, Bank Mandiri chief economist.
Annual inflation is running at about 6.3 per cent, above the central bank’s comfort zone of 4-6 per cent.
It is expected to climb to about 7 per cent – partly because the authorities are reluctant to raise rates further for fear of attracting even stronger financial flows.
“It’s not like Thailand and Brazil. Indonesia is maintaining an open foreign exchange market by regulating banks and not foreign investors,” Mr Adityaswara said.
The main technical measures announced in Indonesia include the reintroduction of a 30 per cent cap on lenders’ short-term overseas borrowing and an increase from 1 per cent to 5 per cent in the required ratio of banks’ foreign exchange reserves to third-party foreign-currency deposits. The ratio will rise later to 8 per cent.
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