DESPITE the resilience of its currency, Indonesia saw a drop in net capital flows in 2018 against the backdrop of a strengthening greenback, Citi economists noted in a recent report.
In general, the pattern of emerging markets’ net capital flows tended to reflect relative resilience to shocks from a strong US dollar - rather than net foreign exchange gains, which shrank in many markets on the back of mounting debts.
But Indonesia - along with countries such as Russia, India and the Czech Republic - bucked this trend, which the Citi team attributed to a fear of a widening current account deficit.
They figured that Indonesia’s situation was similar to the environment in India, where higher crude prices, the stronger US dollar and the impact on fixed-income portfolio flows from global rate hikes all put the squeeze on the current account deficit.
External debt related to foreign direct investment (FDI) has grown in Indonesia, notably in domestic-oriented sectors such as manufacturing and real estate.
Still, the exclusion of inter-company loans has reduced Indonesia’s vulnerability to currency shocks, said the economists.
But they added that currency mismatch risks could still exist if businesses tap overseas funds through offshore special purpose vehicles and funnel them into affiliates for domestic uses.