Indonesia Tackles Hot Money by Ending Short-Term SBI Auctions's central bank said Wednesday it has stopped regular auctions of Sertifikat Bank Indonesia bills with tenors of less than nine months and will rely more on untradable term deposits to manage liquidity, the latest effort to reduce inflows of short-term capital it fears could destabilize the banking system.

Bank Indonesia said the move is an effort to reduce commercial banks' reliance on Bank Indonesia's short-term paper to manage their excess liquidity and to deepen the local financial market. Analysts say it is also likely to discourage inflows of “hot money“ as less SBI paper will be available to foreign investors.

Later the same day, Bank Indonesia Deputy Gov. Budi Mulya told reporters that the central bank plans to introduce a six-month term deposit this week. Currently, the longest tenor for the facility is five months, which was introduced in January.

Mulya also said that the rupiah still has room to appreciate, but didn't say to what level. At 0745 GMT, the rupiah was at IDR8,915 to the U.S. dollar, steady from its level late Tuesday.

“The policy will have impact on capital inflows, but the impact will likely be insignificant,“ said Standard Chartered economist Eric Sugandi. Sugandi said that foreigners can still park their money in the government bonds. He said the measures would also encourage commercial banks to increase their loans instead of parking their funds at the central bank paper.

SBI paper and the Indonesian government's rupiah-denominated bonds have been favored by foreign investors because of their attractive yields compared with those on investments in slow-growing advanced economies. Indonesia, like other emerging market nations, has been concerned about the negative impact on domestic financial markets if the hot money inflows suddenly reverse.

The country's healthy economic prospects and relatively high yields on rupiah-denominated assets attracted a deluge of short-term fund inflows last year, resulting in a 30% foreign holding in the government's local bonds, one of the highest ratios in the region.

Indonesia's vulnerability to abrupt foreign capital movements was highlighted in recent weeks, when worries about rising inflation prompted some investors to pull money out of Indonesian bonds and stocks, hitting the local currency hard. Many investors seem to have returned in recent days, taking Bank Indonesia's 25-basis point hike last Friday as a sign it's moving to contain inflation.

Wednesday's move followed other measures taken by Bank Indonesia since June last year to reduce the risk to the economy from foreign capital flows. Among those earlier steps, the central bank imposed a one-month minimum holding period for its SBIs, suspended auctions of one-month SBIs and introduced non-tradable term deposits, which are not available to foreign investors.

Foreign holdings in SBI paper gradually fell to $5 billion in January from $9.3 billion in April 2010. Other Asian countries, including Taiwan, Thailand and South Korea, have also taken steps to decrease the dangers of swift moves in foreign capital.


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