Capital Outflows from Indonesia as Fed's Quantitative Easing May End
Emerging markets, such as Indonesia, have been feeling the impact of a recovering economy in the United States. Last month, the Federal Reserve announced that, if the economy of the USA continues its improving trend, it will end its quantitative easing program gradually in 2013 until a complete stop in 2014. As Indonesia is one of the emerging economies that benefited from the spillover effects of the Fed's monthly bond-buying program, the country now feels the negative impact of the possible stop to the program.
In the first six months of 2013, Indonesia experienced capital outflows amounting to IDR 38.72 trillion (USD $3.9 billion), which consists of IDR 20.13 trillion worth of Indonesian shares and IDR 18.59 trillion worth of government securities (SUN). This result is in stark contrast with the same period last year, when the country experienced capital inflows of USD $6.8 billion.
Economic Minister Hatta Rajasa said that if Indonesia's financial stability will become threatened, the government will be ready to implement its crisis management protocol (made in cooperation with Indonesia's central bank), which includes a bond stabilization framework in which government securities will be bought through the State Budget or by state-owned enterprises.
It is expected that in the months ahead foreign capital outflows will continue. On the domestic side, foreign investors are concerned about the country's widening trade deficit (which results in a weakening IDR rupiah) and about higher inflation which causes domestic consumption (the main pillar of Indonesia's economic growth) to moderate.
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