Indonesia plays down threat of capital controls

By Gde Anugrah Arka

JAKARTA (Reuters) - Indonesia's central bank on Wednesday played down the immediate threat of curbs on foreign investment in short-term debt after its earlier mention of controls hit the rupiah currency.

Deputy governor Hartadi Sarwono said late on Tuesday the central bank was considering such controls to curb hot money flows, steps already taken by Brazil and Taiwan recently. The remarks pushed the rupiah down about half a percent against the dollar in early Wednesday trade.

The rupiah later trimmed losses after Sarwono told Reuters that possible curbs on foreign holdings of short-term SBI debt were just one of the options the central bank was studying and that so far currency moves linked to money flows were manageable.

"As a precautionary measure, of course BI (Bank Indonesia) is studying the possibility of limiting foreign ownership in SBIs, but it doesn't necessarily mean that we will implement it," Sarwono said by mobile phone text message.

Taiwan earlier this month banned foreign funds from investing in time deposits in what appeared to be aimed at deterring currency speculation, while Brazil last month brought in a tax on capital inflows.

Those moves coincide with a wider debate over whether the weakness of the U.S. dollar and the U.S. Federal Reserve's easy money policy is helping to fuel fresh asset bubbles as investors seek higher-yielding assets, particularly in emerging markets.

Foreign investor interest in Indonesia has soared this year thanks to a combination of political stability, economic growth, falling inflation, lower interest rates, plus an increasing awareness that Southeast Asia's biggest economy could achieve investment grade within a couple of years and join the ranks of the BRIC economies Brazil, Russia, India and China.

The rupiah, Asia's best performing currency, is up about 17 percent against the dollar this year while stocks, up 80 percent, are also among the regions' top performers.