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Hot money flows into Indonesia

11-01-2012 10:05 BJT

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With the ongoing economic troubles in Europe and the slowing growth in the US, investors are looking to emerging markets like Indonesia. This sudden influx of capital can both be beneficial and dangerous.

GDP growth of over 6 percent a year. An average of 20 percent profits per annum in the stock market. 240 million strong rising middle class. A member of the G20. Indonesia is a hot destination.

These facts have not gone unnoticed in the financial world, turning heads of some of the biggest investors.

Ibrahim, senior analyst with Harvest Futures, said, “With economic slowdowns across the globe and low interest rates, investors are looking to emerging markets for profits and Indonesia has been very attractive.”

This is called hot money, an influx of short term foreign funds injected into the economy through risky assets with high yields.

Capital inflows into emerging markets can help finance investments and stimulate growth, but there’s an inherent risk. With more money in the economy, and the same amount of goods, this means that the prices of goods will inflate, and the dangers of hot money don’t stop there.

The 1997 Asian financial crisis is considered by many as the poster boy for how dangerous hot money is. Because hot money is short term by nature, when the funds were withdrawn and asia didn’t have strong fundamentals, the bubble bursted.

But Ibrahim is confident that Indonesia now will be able to take advantage of the hot money with proper regulations and one crucial difference since 1997.

Ibrahim said, “Indonesia’s fundamentals are strong, we have commodities market as a base and a strong domestic growth, the fact that the currency is stable is a testament that this is a real growth and not just a hot money effect.”

Reporter: “The challenge now is with the government to balance the economy and make sure that the inflow of capital can be turned into real benefits for the people.”

 

Editor:Zhang Rui |Source: CCTV.com

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