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Economic recovery somewhat threatened

JAKARTA: World Bank reminds that capital inflow and the commodity price hike potentially threaten the economic recovery of developing countries this year. In World Banks report entitled Global Economic Prospects: Navigating Strong Currents published

JAKARTA: World Bank reminds that capital inflow and the commodity price hike potentially threaten the economic recovery of developing countries this year. In World Banks report entitled Global Economic Prospects: Navigating Strong Currents published yesterday, World Bank projected that the capital inflow into those developing countries shall rise to 10% during 2011.It is projected that the net capital inflow into those developing countries has soared by 44%, reaching US$753 billion in the end year 2010 or around 4% of GDP. Although such capital inflow is relatively beneficial to finance investment and back economic growth, an excessive capital inflow may grant particular risks to the economy.An excessive capital inflow may arouse particular risks as well as threaten mid-term recovery especially if the currency rate suddenly rises or asset bubbles take place, said Hans Timmer, World Banks Director of Global Prospect during the launch of the report.The most significant contributor to the inflow hike happens to be a short-term portfolio, equity and corporate bonds in particular as it is estimated to reach US$86 billion in 2010 from US$6.4 billion in 2009. On the contrary, with regard to the long term foreign direct investment, the jump only accounted 16% to US$10 billion.Such capital inflow inundation was mainly triggered by the low interest rate policy in the developed countries and solid economic prospectus in the developing countries. According to Timmer, there has not been any policy that is quite effective to dim excessive capital inflow.The capital control is barely effective, thus there should be a large scale policy to stabilize this condition, for example by fiscal tightening. Central banks in developed countries are also urged to review their monetary easing policy.On the other side, the Washington DC-based development bank also reiterated that the obvious discrepancy of the monetary policies in the developed and developing countries also propel volatility in the commodity market. The currency movement and the expectation of lower yield in the developed countries relatively boosted the dollar-denominated commodity price as it rose by 17% since September 2010.One of the most anticipated things is that if the commodity price continues to rise either due to energy price hike where oil price is estimated to surpass US$85 per barrel this year or the poor supply of foods following the damaged crops. On such condition, the price may continue to rise and in the long run may cause the significant jump of poor citizen.After referring to those risks, PDB of developed countries is projected to grow by 6% in 2011 or weakened from last year estimated realization of 7%. In general, considering the potential widespread of European crisis, the global GDP may slow to 3.3% from the 2010s estimated realization of 3.9%.In the meantime, Indonesias GDP was projected to grow by 5.9% during 2010 as it will rise by 6.2% in 2011 and 6.5% in 2012. Although the archipelago country has been benefited by the international capital inflow and the rising commodity price, it somewhat still has to face particular challenges in managing those risks.Similar to Thailand, Indonesias equity market in fact soared more than 20% since January 2010. Yet, having seen the implication from the currency movement, World Banks senior economist for Indonesia, Enrique Blanco Armas is confident that the excessive capital inflow will not significantly affect Indonesia.Rupiahs fluctuation is relatively low compared to other Asian currencies. The impact of excessive inflow will not be that significant merely since Bank Indonesia had undertaken several interventions to stabilize rupiah. Besides, there is still a room for Indonesia to tighten the monetary policies, he resumed. By preparing so called bond stabilization fund (BSF), the government has anticipated the risk of foreign capital inflow into the national economy. Finance Minister Agus D. W. Martawardojo said BSF is a strategy to mitigate the capital inflow. BSF is formed by gathering funds from state-owned companies, which is hopefuly to strengthen foreign reserves at Bank Indonesia.According to him, stabilizing the government bonds has been initiated by using BSF.To utilize the BSF, the government has provided a certain mechanism and governnance as well as the fund purpose. However, Agus declined to further explain the mechanism.He said the current situation is not urgent to use the BSF because the government bonds are still managable. "In 2008, the government bonds plunged and stabilization was required to recover the situation. Currently, we think it is not necessary to use the BSF," he said.According to him, the most important thing right now is stabilizing the bond market by trying to make macro economy indicators in good level. Hence, the balance of payment is still in positive level as well trading performance. Banking and fiscal policy should be done more prudent.He is optimist the fiscal management this year will be better as most of the ministries are ready to spend budget.Temporary Head of Fiscal Policy Body at the Ministry of Finance Agus Suprijanto said BSF is a strategy to solve the crisis. The BSF is formed by several state-owned companies which are willing to provide some cash. The funds are gathered at profit and loss of state-owned companies, hence they won't redeem it. Agus Suprijanto said the government will not provide a certain amount should be allocated by each SOE.The fund provided by SOEs for BSF is expected not to burden the SOEs financial. "Yang saya tahu BUMN perbankan seperti Bank Mandiri, BNI, BRI, itu pasti [berkomitmen]. Ada Taspen, ada Lembaga Penjamin Simpanan. Yang pasti lima itu akan kami koordinasikan dengan persetujuan Kementerian BUMN," tuturnya."As I know several banks such as Bank Mandiri, BNI, BRI [commitment], Taspen, and Lembaga Penjamin Simpanan. The five SOEs will be coordinated under approval of the Ministry of Finance," he said. Ikatan Sarjana Ekonomi Indonesia (ISEI) juga menyarankan kepada pemerintah dan Bank Indonesia untuk menempuh bauran kebijakan (policy mix) yang lebih terkoordinatif dalam menghadapi derasnya capital inflow.Secretary General of Association of Indonesian Economists (ISEI) Anggito Abimanyu said the massive capital inflow hasn't not been utilized as investment funding sources. So far, investors use the capital inflow to buy short term portfolio investments. "The capital inflow might create a bubble in economy and increase the risk of reversal, creating macro instability," he said. (agi/asd/mrp/t02/wiw)

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