RI’s capital inflow and the downside risks that follow
Putera Satria Sambijantoro, Jakarta | Tue, 04/27/2010 9:01 AM | Opinion
You are simply not a savvy foreign investor if, given the current global econo-mic situation, you overlook Indonesia as a place to invest your money.
In the past you used to have well-developed and industrialized countries on the table as your priority to invest because they tended to be more secure compared to developing countries.
But while the US’ economic recovery is still beset with various obscurities, and European’s economic stability is disrupted by the debt-troubled PIGS economies (Portugal, Ireland/Italy, Greece, Spain), currently you may want to wait a little longer before you can be finally sure of investing your money there again.
This is the moment when you should start to notice that in the east, several emerging Asian economies can be considered as less risky places to invest as they are trouble-free and withstand the global financial crisis better than developed economies.
Indonesia is one of those economies, recording an impressive 4.5 percent economic growth during the crisis and has seen significant upgrading of its investment grade rating because of its imposing economic performance.
Besides, its economy is bolstered with political stability, violence-free democracy and its huge domestic market.
In the midst of the financial storm, which has left most economic frameworks in the world shattered, what Indonesia ’s economy boasts
in its disposal will surely make you and your fellow investor friends turn heads.
Indeed, money is flowing in. The rise of demand for one country’s investments theoretically leads to a higher demand for the currency of the country itself, and the unusually strong rupiah these days, which has surged to a 30-month-high level to almost Rp 9,000 per US dollar, is a clear reflection of the rising number of foreign investors who have crammed the Indonesia ’s market.
The problem is when someone has too much money in their hands because it can engender more convoluted quandaries than they previously expected.
While many perceive the improvement of Indonesia ’s image in the eyes of foreign investors as a good thing for Indonesia , policymakers should be wary about the long-run corollaries that can possibly occur when Indonesia is inundated with too much capital inflow.
The most important thing to bear in mind is that the stronger-than-ever rupiah at the moment, unfortunately, may not make all Indonesians better-off.
For instance, just ask Indonesian exporters who surely have been monitoring the rapid rise of rupiah in recent weeks with deep anxiety.
In fact, the rupiah — whose rate moves in an unpredictable fashion, appreciating swiftly in such a short period as we have seen in recent weeks — will be a huge blow for them as Indonesian goods will be more expensive overseas and could eventually damage Indonesia ’s exports as a whole.
Yet because of the excess amount of capital outflow, another problem, inflationary pressure, is also lurking behind the shadows.
Too much capital inflow can stimulate a considerable rise in money supply and, eventually, inflation. The government could welcome capital inflow to the country, but if inflation’s presence in the economy goes unnoticed and largely ignored, inflation could nibble our economic growth and disrupt our economic development.
If it is already too little and too late and the inflation has soared, Paul Volcker, the former Federal Reserve chair, can be asked about how hard and costly it was when he tried to trim down the inflation rate during his tenure.
In addition to the spat over the unusually strong rupiah and the looming threat of inflation, it is also worth noting that the increasing demand for Indonesia’s investment has led to yet another problem: The current swell of the price for Indonesian shares and assets has risen to such an abnormal level, which has instigated concern on whether an economic bubble is just around the corner.
For many economists, the most feared weapon that an economic bubble possesses inside its arsenal is its ability to swell and burst almost any time and in such an impulsive way — and very often, when it truly bursts, it generates a devastating repercussion. The burst of the housing bubble in mid 2008 in the US , in fact, was deemed by many as the key trigger to the worst financial crisis that Americans have seen in almost a century.
And economists hate to deal with economic bubbles very much, knowing the fact that the term that economists are keen to pay heed to the most is always “stability”. An economic bubble, in contrast, has always been notorious for its “volatility”.
An economic bubble may possibly emerge because of the fact that the largest share of Indonesia ’s massive capital inflow these days, unfortunately, is dominated by short-term investment or hot money.
It is an “easy-come, easy-go” investment. When those investors with their hot-money find more attractive countries to invest in, they will simply cash in their chips, pulling their investments out from Indonesia , which will cause the once-soaring price of investments and assets to suddenly freefall.
With such ominous threat from the burst of investments and assets bubble, economists’ fear of Indonesia ’s excessive number of capital inflows is indeed understandable.
Some may rejoice in current news about the massive number of new investors that deluge the country, the insurgence of the rupiah, or the soaring stocks prices in recent weeks; but when we look at the other side of the prism, they actually also leave economists and policymakers in a conundrum.
This is basically because failing to solve this excessive capital inflow problem in the short-run may likely lead to bigger problems in the economy, which will require higher sterilization costs in the future and impede the long-term plan of Indonesia ’s economic expansion.
What seems to be good can also be the opposite – just like the dilemma faced by Indonesia because of its excessive amount of capital inflow. It seems positive for Indonesia ’s economy, but in actual fact, hides perilous threats underneath.
The most im-portant thing is that a strong rupiah at the moment, unfortunately, may not make all Indonesians better-off.
The writer is a student at the University of Indonesia ’s School of Economics .
