The Importance of Capital Flow Management

monarchcb.com - The awards that have been awarded to various domestic capital instruments in the last 2 weeks are not free from the entry of foreign budget movements (capital inflow). Investor confidence rose along with economic opportunities and the ability of Indonesia's financial markets to recover.

Throughout November 2018, the total movement of foreign budgets into the capital market was IDR 26.2 trillion. The details are IDR 9.5 trillion in the stock market and IDR 16.7 trillion in the loan market (information as of November 16, 2018). The JCI increased by 3.1% (-5.4% ytd), the yield on a 10-year reference loan declined 49.2 bps (+173, 2 bps) and the rupiah strengthened 3.9% to Rp. 14 .612 to the US dollar (depreciated 7.7% ytd).

The increasing confidence of investors, accompanied by the entry of foreign budget movements, cannot be separated from various positive advances that originate from external or internal sources. The reduced anxiety of the business war between the Syndicate America and China, the risk of a more measured Fed interest rate escalation and positive Brexit Deals are some of the external factors that are pressing for capital flows to countries with non-US dollar heritage such as the European Union and most of the listed Asian countries. Indonesia.

Meanwhile, domestically, Indonesia's economic development in the 3rd quarter of this year was recorded at 5.17% (yoy), higher than market expectations of 5.15% (yoy), which was responded positively by the market. In addition, the increase in the status of the domestic equity market has become overweight and the policy mix that has been tried by the authorities and Bank Indonesia is an attractive aspect for investors to put their funds into the country.

Capital inflow can contribute positively to the economy in the long term because it can improve the style of portfolio capital. This will accelerate the development of financial markets and increase market liquidity. A strong increase in capital can be a significant contributor in financing economic activities. However, high foreign budget movements must always be watched out for because it has the potential to create a risk of capital flight (sudden reversal) in an instant and create asset price bubbles.

With the risk of major financial market volatility being large, the flow of capital flows from foreign investors is moderate. The entry and exit of capital movements in a short period of time is often experienced by developing countries, especially the occurrence of sudden large outflows of capital which disturbs financial stability and can cause a financial emergency. Therefore, the management of capital flows is very much needed at this time, whether from the authorities, essential banks or entrepreneurs.

Efforts that can be taken in managing the risk of capital flows in outline consist of direct (direct policy) and indirect (indirect policy) arrangements. Direct regulation can take the form of market controlling for the foreign exchange business, such as the separation of business capacity by constantly observing the comparison of economic vulnerabilities.

Meanwhile, indirect regulation can be tried through the application of policies that can limit the movement of capital flows such as taxes in an accurate or suggestive way on financial flows for domestic routes (Tobin tax is tax on all spot conversions of one currency into another, proportional to the size of the transaction: James Tobin, 1978) and other pricing platform policies.

The high volatility of the change rate can be an opportunity for speculators to seek profit. By regulating the release of capital movements, to the point of emphasis the decline in the change rate can be limited. In early November 2018, BI implemented the Domestic Non Delivery Forward (DNDF) business as one of the monetary operations strategies aimed at maintaining sufficient liquidity in both the rupiah and foreign exchange markets.

The DNDF application is also expected to minimize hypothetical businesses that can disrupt the stability of the rupiah. In addition, the policy of interest rates, the use of foreign exchange reserves, and the increase in foreign exchange earnings from exports (DHE) are steps for BI and the authorities to protect rupiah instability and foreign budget movements.

The essential bank has the policy to use the reference interest rate as a policy instrument. Registered during this year, BI has increased interest rates by 175 bps to 6% as of November 2018. Late last week, the authorities also issued a policy that reversed withdrawing foreign budget movements through the XVI policy package that focused on expanding tax holiday facilities, relaxation. Minus Capital (DNI) and urged DHE.

Regulations for the entry and exit of capital flows must be accompanied by coordination of monetary and tax policies and systemic reforms. As a growing country, Indonesia is looking for foreign investment to strengthen the national economy and generate activity squares.

However, the management of capital flows must be consistent and efficient so that have a positive impact on Indonesia's financial system in the long term. As a result, Indonesia's financial system is not vulnerable to external spillover risks.