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NEWS UPDATES Asean Affairs  15 November 2010

Indonesia looks at stabilizing debt market

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The Indonesian government is studying setting up a fund to stabilize bond prices in case foreign investors suddenly start dumping Indonesian assets, the latest in a series of efforts to manage the massive inflow of funds from abroad.

"They have that in South Korea where in the case of a reversal, authorities can buy back bonds to stabilize them. We're still studying it," Perry Warjiyo, director for monetary policy at Bank Indonesia, said on Friday.

"Bank Indonesia and the Finance Ministry will hold a meeting [this] week to better coordinate our steps in tackling capital inflows," he added. Perry did not return calls seeking comment.

Indonesia, along with other emerging economies, has seen a surge of inflows into securities such as stocks and bonds as investors from slower-growing countries seek higher yields. The worry is that financial markets would be thrown into chaos should those inflows suddenly reverse.

Indonesia, Brazil and other emerging markets are introducing capital curbs to avert financial instability from investors seeking higher-yielding alternatives to near-zero interest rates in the United States, Japan and the eurozone, Bloomberg reported last week.

Finance Minister Sri Mulyani Indrawati, now a managing director at the World Bank, said last week that Asian economies may need to consider capital controls to ease the risk of hot money flying out.

The advice comes after the US Federal Reserve announced it would try to boost the US economy with plans to buy $600 billion in long-term Treasury bonds as a part of efforts known as quantitative easing.

Still, economists are expressing mixed responses over the prospect of such a move by finance authorities.

Bank Indonesia's open market operations focus on reducing volatility in the rupiah.

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