Indonesia

The Indonesian economy performed well in 2018, despite external headwinds, including capital flow reversals. Growth stabilized above 5 percent and inflation eased to around 3 percent. A surge in imports and weak export growth contributed to a higher current account deficit. Growth is projected to remain stable over the medium term. Inflation is expected to remain within the target band and the current account deficit is expected to narrow gradually on lower imports. Risks are tilted to the downside and are mainly external. Reliance on portfolio inflows to finance the twin deficits leaves Indonesia vulnerable to capital flow reversals. President Joko Widodo has been re-elected for a second term and has committed to push ahead with economic reforms. Creating quality jobs for the young and growing population to harness Indonesia’s demographic dividend requires a stronger impetus to growth, which has been constrained by structural weaknesses, including low tax revenues, shallow financial markets, and labor and product market rigidities.

Capital Flow Reversals, Sudden Stops, and International Reserve Adequacy: Further Evidence From the Global Financial Crisis

Using a dataset of 39 emerging markets, we examined the role of international reserves during currency and capital flow crises. Our analysis revealed that higher levels of reserves are associated with lower intensity crises where intensity is measured by the magnitude of the change in exchange market pressure (EMP) or size of capital flow reversals. We also find evidence for the cushioning effects of reserves during the crises. When used against capital flow reversals, reserves can help mitigate the negative output effects of the crisis. Finally, our findings show that reserve adequacy should be evaluated based on the nature of the potential crisis. Policy makers may prefer to refrain from using reserves if export competitiveness is more important than potential balance sheet effects of currency depreciation.

The relationships among capital flow surges, reversals and sudden stops

Purpose This paper aims to investigate the relationship between capital flow surges, reversals and sudden stops. Design/methodology/approach Emphasizing the importance of looking at the behavior of domestic as well as foreign capital flows, the authors distinguish sudden stops from capital flow reversals by attributing the former to foreign capital flows only. Findings It is found that, despite the large differences in the number of surges identified by several different measures in the literature, a majority of surges do end in reversals of some type. The percentages tend to be slightly over half for surges in net capital flows, but on average, 70 per cent of gross surges end in sudden stops. Furthermore, contrary to popular belief, approximately half of sudden stops and net capital flow reversals are not preceded by surges. It is also found that surges that persist longer are more likely to turn into sudden stops and reversals. Research limitations/implications The authors find substantial empirical differences in the characteristics of sudden stops (based on gross foreign flows) and reversals (based on net flows). Practical implications Large inflows of financial capital are not always a strong indicator that a country’s economic policies will continue to provide stability in the future. They may signal an increase rather than reduction in the risk of future instability. Originality/value This study focuses on an issue that has been less explored to date, the relationship between capital flow surges, reversals and sudden stops. The authors distinguish, redefine and document differences among capital flow reversals and sudden stops. Duration of surges is related to the likelihood of having reversals and sudden stops.