Grace D. Amianti, Jakarta – The country needs to further improve business confidence in order to avoid massive capital flight, which could hit the country if the government is unable to improve economic conditions, analysts have said.
Analysts said that the government needed to keep its promise to mend the country's economic woes in order to be able to regain investor confidence.
Tony Prasetiantono, an economist at Gadjah Mada University, said the foreign fund outflow that hit the local financial market in the past several days, took place because of panic selling rather than Indonesia's economic condition.
He said that such a capital flight would gradually ease if the government could convince people that its economic programs would put the economy back on track.
"The foreign funds will return to emerging countries," he said, when asked to comment on a Standard & Poor's report, which said that Indonesia was more exposed to capital flight than Malaysia, despite the latter's tougher political and economic conditions.
Tony said the government should keep its promise to accelerate the disbursement of its infrastructure spending in the second half of this year in order to push up economic growth, which rose only 4.7 percent in the second quarter, the lowest since 2009.
While somewhat agreeing with Standard & Poor's view, Ahmad Sujatmiko, an analyst at local rating agency Pefindo, said Indonesia's fundamental macro-economy was still resilient as the inflation rate was under control, which should be maintained by Bank Indonesia (BI), amid massive outflows from emerging markets.
"Indonesia's sovereign bonds still offer the highest yield among neighboring countries, so that it remains attractive to foreign investors," Ahmad told The Jakarta Post.
On the other hand, analyst Reza Priyambada of NH Korindo Securities said Standard & Poor's view might negatively affect market players' perception of Indonesia if the government lacked actual implementation in its spending acceleration and infrastructure development.
While having more stable political conditions, Reza said Indonesia had difficulty gaining support from lawmakers to carry out its economic programs.
"If this situation is not handled well, it will affect the rupiah more, because it all comes back to perception and the market will have a negative sentiment toward the country," Reza said.
Aside from high reliance on foreign investors in the capital market, BNI Securities head of research Norico Gaman said Indonesia was deemed more vulnerable because of its reliance on exports of commodities.
As prices of commodities remain low and show no sign of recovery soon, Indonesia's foreign exchange (forex) reserves may be seen as more vulnerable to capital flight, according to Norico.
"The government should tightly monitor supply and demand of US dollars, especially finding ways to reduce dollar demand and maintain stability of the rupiah," Norico said, adding that Indonesia should find non-traditional export destinations for its commodities and new sources of forex, such as from tourism.
According to the central bank's data, Indonesia's government, banks and companies recorded US$304 billion in foreign debt, which is feared to shake up the country's forex reserves if capital flight increases.
Source: http://www.thejakartapost.com/news/2015/09/09/ri-strong-enough-avoid-capital-flight.html