We’re Ready for Exit of QE Flows: Indonesia Official
Indonesia is ready for a sudden withdrawal of foreign funds from the country once major central banks around the world start unwinding the aggressive monetary stimulus that has helped boost inflows into Asian assets, a senior Indonesian government official said on Friday.
Talk about when the U.S. Federal Reserve will start unwinding its hefty monetary stimulus has dominated markets this week, with comments from one Fed official that the stimulus could start to be taken back over the summer months creating some nervousness in global markets.
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"What the U.S. is doing with QE [quantitative easing] so far has helped our economy because capital inflows are robust, but of course we are already prepared for the worst case, for a sudden reversal of flows and all the money going back to the U.S., Europe or Japan," Bambang Brodjonegoro, the head of fiscal policy at Indonesia's ministry of finance told CNBC's "Cash Flow."
"So, from the fiscal and monetary point of view, we have prepared a broad stabilization framework. We have prepared for a crisis, for any crisis because we experienced the 1998 [Asia financial] crisis, the 2008 crisis," he added.
In its latest economic outlook for Asia, the International Monetary Fund warned of overheating risks in the region, saying Asian policymakers must be ready to act "early and decisively" to prevent the situation from escalating.
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Southeast Asian equity markets have seen strong gains this year and analysts say that is in part the result of strong foreign demand. Indonesia's benchmark stock index is up almost 18 percent so far this year, in line with gains in broader Southeast Asian markets.
A strong economic performance has also attracted inflows into Indonesia's bond market in recent years.
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Asked if Indonesia was considering capital controls to limit the impact of any sudden withdrawal of funds, Brodjonegoro said: "No, not at all. For bonds we have a stabilization framework and for the foreign exchange reserves we have stand by loans from several parties, as well as budget support."
Talking about the outlook for Indonesia's monetary policy, Brodjonegoro said the central bank should concentrate on inflation even though the outlook for economic growth has dimmed slightly.
Indonesia's central bank left its key interest rate unchanged at 5.75 percent on Tuesday and downgraded its forecast for second quarter economic growth to around 6 percent from 6.2 percent amid uncertainty about the outlook for the global economy and the government's fuel price subsidy policy.
"Growth has been weaker than it was last year, but 6 percent growth given the global economic situation and compared to some of our neighbors is still quite promising," Brodjonegoro said.
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"So, we think the central bank needs to focus on inflation rather than stimulating growth right now," he added.
Indonesia's annual inflation eased in April to 5.57 percent from 5.9 percent year on year a month earlier, but remains above the central bank's inflation target of 3.5-5.5 percent.
— By CNBC.Com's Dhara Ranasinghe, Follow her on Twitter: @DharaCNBC