What’s this?
Another country touting the possibility of capital controls in a bid to protect itself from an appreciating currency?
From Reuters:
SINGAPORE, Nov 18 (Reuters) – The Indonesian rupiah slipped on Wednesday after the central bank threatened to restrict foreign ownership of short-term debt, but the high-yielding currency later pared losses as fears of immediate capital curbs eased. Other Asian currencies were rangebound as the dollar drifted sideways with investors waiting for U.S. inflation data, as well as minutes from the Bank of England’s November meeting for clues on its decision to expand its asset buying scheme.
The Indonesian rupiah shed 0.6 percent to 9,435 per dollar in early trade after Deputy Bank Indonesia governor Hartadi Sarwono said late on Tuesday the bank was considering controls on foreign ownership on the central bank’s debt, or SBI.
Here, by the way, is how hot money flows into Indonesia have affected the performance of the rupiah versus the dollar in the last three months:
As mentioned in the story, the rupiah did pare losses after the central bank played down the prospect of imminent controls on investment in short-term Indonesian debt securities.
Furthermore, Indonesia’s government later tried to debunk the story completely. A finance ministry director told Reuters:
“We have no plan (to do that). In the past foreign ownership reached 20 percent. Currently it is around 17.7 percent. We have no limit…The current level is normal,”
Of course, that didn’t stop analysts from fretting about the implications of capital controls if they did happen. From BNP Paribas on Wednesday:
Soft US IP data coupled to more downbeat Fed and IMF comments dented the past week’s risk taking run but today’s opening tone appears strong again and all eyes remain on EURUSD’s tentative resumption of its rally. But talks over currency intervention will be scrutinised in Emerging Markets after Indonesia’s central bank suggested yesterday that capital controls are being discussed in order to curb inflows.
As it happens, Barclays Capital analysts just returned from meetings with the Indonesian Bank in Jakarta this week. Quite to the contrary, in a note published on November 16, they expressed their belief the Bank would be happy to see the rupiah appreciate for now — largely as a means to control imported inflation.
As they wrote (our emphasis):
The key underlying message from our meetings with Bank Indonesia is that the central bank is watching inflation expectations, with its bias to use the currency rather than the policy rate as an instrument to control inflation. This largely derives from the central bank’s cautious nature, with its preference to err on the side of growth. Given this backdrop, we continue to expect the central bank to stand pat, keeping the policy rate unchanged at 6.5% for the next few months, and to use the currency to lean against inflation. As such we expect the rate hiking cycle to begin in Q2 next year and are pencilling in 100bp of hikes, with the policy rate ending 2010 at 7.5%.
We think Bank Indonesia is willing to accept a stronger IDR to keep a lid on imported inflation, as long as appreciation is largely in line with the region. Given healthy risk appetite and the yield pick-up available on Indonesian assets, we think the IDR will remain supported until yearend, with our forecast being 9200. For 2010 we remain broadly constructive, though it is fair to highlight that support for the current account will be smaller as the domestic economy picks up. There may also be some pressure points for the IDR as spikes in risk aversion can be expected as market speculation about exit strategies gains momentum.
One to watch nevertheless.
Related links:
An own goal in Brazil’s capital controls? – FT Alphaville
Capital flows, real exchange rates, and capital controls: Some Latin American Experiences – NBER working paper