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NEWS UPDATES Asean Affairs           15  July 2011

US downgrade could aid Indonesia

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A credit rating downgrade on the United States could cause money to flow into Indonesia for a short term, as investors seek better returns on assets such as the rupiah, the central bank said on Thursday.

"The impact of [a US downgrade] on our financial market would be to increase inflows," said a Bank Indonesia deputy governor, Hartadi A. Sarwono.

Moody's Investors Service, a ratings agency, sparked worldwide concern when it placed the US triple-A debt rating on downgrade watch. Concerns that US leaders will fail to strike a deal on raising the country's debt limit by Aug. 2 have caused investors worldwide to take notice.

Bank Indonesia initiated some macroprudential policies earlier this year, such as raising banks' reserves and halting short-term bank certificates, to control inflow and reduce the country's vulnerability to an outflow.

"In the long run, yes, I see inflows still coming to Indonesia, but Moody's evaluation of the United States will not necessarily boost inflow to Indonesia immediately," said David Sumual, an economist at Bank Central Asia.

"Should there be a shock, investors will first be looking for a safe haven such as the Swiss franc, or gold or even US dollars, just as they did in last global financial crisis," he said.

Still, analysts such as David urged the government and the central bank to encourage more financial instruments in the country to absorb and keep incoming capital.

Stocks have been advancing, with the benchmark Jakarta Composite Index closing last Friday at a record high above the 4,000 level, driven by purchases coming from foreign investors.

The inflows though, have complicated Bank Indonesia's policy-making decisions. It has to balance excess liquidity in the financial system to support growth without triggering an asset bubble or creating vulnerability for a sudden reversal.

"I think the suitable strategy for Indonesia right now is to diversify and broaden domestic financial instruments and to increase our capacity to absorb incoming capital," David said. "Government should encourage good companies that have not listed on the market to make initial public offerings, or companies should issue more bonds, rights issues, etc."

"Infrastructure bonds and public private partnership should also be encouraged," the analyst added.

David said there were few concerns that the United States would actually default on its debt because that could create turmoil in the world financial market.

"Moreover, the problem is more about politics, and I think it will be resolved before the deadline," he said.


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