International Capital Flows in Calm and Turbulent Times by Griffith-Jones Stephany;Gottschalk Ricardo;Cailloux Jacques;

Author:Griffith-Jones, Stephany;Gottschalk, Ricardo;Cailloux, Jacques;
Language: eng
Format: epub
Publisher: University of Michigan Press

Herd behavior of foreign investors also had a role to play in increasing capital inflows and outflows to and from Indonesia. They did buy stock, commercial papers, and even real estate, and they invested in infrastructure projects extensively. The reform, which covered nearly all aspects of the economy, combined with the perception of Indonesia as a stable country and one of Asia’s success stories, generated a massive capital inflow beginning in the early 1990s. No guarantee was needed, as the government supported the exchange rate and had the reputation to take over the private sector’s external debt if things went wrong. Demand for securities issued by Indonesian (state and privately owned) companies increased, as foreigners are allowed to own up to 49 percent of the listed shares issued by national companies (except banks). The national companies are also allowed to raise funds by selling securities in domestic and international stock and bond markets.

Capital inflows were encouraged further as domestic interest rates (adjusted for relatively limited actual exchange rate movements) rose and were sustained through the 1990s. Peregrine, an investment bank based in Hong Kong, collapsed in early January 1998 due to a single massive bad loan ($265 million) to PT Steady Safe, a local taxi and city bus company in Jakarta. Steady Safe used $145 million to buy 14 percent of a toll road building company owned by Ms. Siti Hardiyati Rukmana (Tutut), the eldest daughter of President Suharto. She was then named to Steady Safe’s board (Time 1998, 14–16). At that time, a close link to the family of President Suharto was solid insurance.

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