CAPITAL MARKETS - Indonesia weighs tax on capital inflows

Indonesian men are reflected on an electronic stock market indicator board at a securities company in Jakarta in this file photo.
Picture: EPA-JAKARTA

Tuesday, November 16, 2010

INDONESIA is studying the possibility of taxing capital inflows, and also has funds to buy back government bonds in case of a reversal in hot money coming into the country, a government official said yesterday.

A tax on capital inflows could deter some investors from continuing to pour money into Indonesia's debt and equity markets, though analysts say authorities' efforts to manage hot money are unlikely to extend to outright capital controls.

Agus Suprijanto, acting head of fiscal policy office at the finance ministry, described the potential tax as a "less favourable" option, as the government looks at measures to manage hot money and curb volatility in its rupiah currency.

"Whether imposing a tax when they are entering, or imposing a tax on them when they are already here so they don't flow out this is still in study," he said.

Thailand has imposed a 15 per cent withholding tax on interest and capital gains earned by foreign investors on bonds, while Brazil's government last month twice raised taxes on foreigners buying local bonds and trading in foreign exchange derivatives, though both countries continue to draw investment flows.

Ultraloose monetary policy in the West has pushed a flood of money into fast-growing emerging markets as investors seek higher returns, while the US Federal Reserve Bank's renewed decision to create more money to buy Treasury bonds has worried Asian policymakers of a fresh surge in hot money flows.

"We also have funds in the state budget to buy back government bonds if there is a (capital) reversal," said Suprijanto, without disclosing the figure.

G20 member Indonesia is worried that a reversal in risk sentiment could spur outflows. A spike in inflation in 2008 led to outflows that caused a 26 per cent slide in the rupiah.

In a nod to emerging markets struggling to contain huge capital inflows, the G20 gave the okay this month to impose "carefully designed" control measures.

Indonesia has already moved to encourage investors towards less volatile longer-dated investments, such as creating a 28-day holding period for its popular central bank SBI debt and going on a drive to attract more foreign direct investment.Reuters

Source : http://www.bt.com.bn/business-asia/2010/11/16/indonesia-weighs-tax-capital-inflows - Nov 16, 2010