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NEWS UPDATES Asean Affairs  13 November 2010

Capital controls outflanked by banks

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Sales of Indonesian credit-linked notes are rising as banks help investors sidestep the countries' efforts to curb foreign investment in their debt securities.

The notes allow investors without onshore accounts to bet on local-currency government debt. Banks issued about Rp 2.4 trillion ($270 million) of notes tied to Indonesian bonds in October, a six-month high.

The sales jump comes as Indonesia and other emerging markets introduce capital curbs to avert financial instability from investors seeking higher-yielding alternatives to near-zero interest rates in the United States, Japan and the euro area. Investors are increasing their focus on developing markets as the engine of the global economic recovery.

"In any countries where exchange controls are introduced their effect can be offset partially by doing credit-linked notes and there will be increased demand" for the securities, said Edward Franklin, an emerging-markets credit trader at JPMorgan Chase & Co. in London.

Investors pumped $39.5 billion into developing-nation bond funds in the first nine months of 2010, putting inflows on course for a record year, according to data from EPFR Global.

Emerging-market securities have soared this year with Indonesian rupiah-denominated government debt gaining 25 percent, the second-best performer after Colombia, according to JPMorgan.

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