Indonesia cbank moves to mop up excess liquidity
JAKARTA: Indonesia's central bank moved on Wednesday to mop up excessive liquidity and encourage more lending, announcing fresh measures that sought also to protect Southeast Asia's biggest economy against new inflationary pressures.
Bank Indonesia said the minimum dollar reserve requirement for commercial banks would be raised to 5 percent of total deposits from March 1 and to 8 percent on June 1, from the current 1 percent. A rise to 5 percent in dollar reserve requirement -which banks store at the central bank --was expected to absorb $1.5-2.5 billion from the market, while the rise to 8 percent could absorb $3 billion, deputy bank governor Budi Mulya told a news conference. Indonesian officials have tried channeling strong capital flows into the country towards longer-dated invest- ments for fear a change in risk sentiment may trigger a "hot money" reversal, hurting the local currency and financial stability. Indonesia has been a darling of emerging market investors this year. The currency has risen nearly 3.5 percent and the stock market 40 percent --driven by strong domestic consumption.
Foreigners have so far this year bought net 86.8 trillion rupiah ($9.6 billion) worth of Indonesian government bonds and 9.7 trillion rupiah of central bank SBI debt, latest Bank Indonesia data shows.
But Indonesia joins countries from South Korea to Brazil that have implemented stricter measures to protect their economies from a tide of capital, although Jakarta's steps have been more modest.
"The concern could stem from the fact that most foreign investors buying local assets exchange their dollar liquidity for rupiah via local commercial banks, which could lead to an alarming situation and create rupiah instability should there be a sudden and massive unwinding," Enrico Tanuwidjaja, an economist at OSK-DMG in Singapore, said of the new measures.
"I think Bank Indonesia is trying to ensure that local banks employ closer monitoring of their U.S. dollar banking books." The central bank on Wednesday also capped banks' vostro accounts at a maximum 30 percent of capital beginning end January, with a threemonth transition time. Vostro accounts are rupiah deposits in commercial banks held by foreigners and considered a form of short-term borrowing by the institution. Inflation, the Achilles heel of Southeast Asia's largest economy, may yet prevent growth from reaching 6-6.5 percent as expected next year. -PB News