Indonesia' foreign exchange reserves stood at US$126.4 billion in August - Photo by Bank Indonesia.

JAKARTA (TheInsiderStories)–Bank Indonesia (BI) decision to issue 9-month and 12-month BI certificate may add volatility in the capital account, according to Nomura Singapore Limited.

Nomura Singapore Limited said the Bank Indonesia‘s move to reactivate the 9-month and 12-month BI certificate and removed the Bank Indonesia deposit certificates is a surprise. Nomura stated this decision potentially boost capital inflow to Indonesia, but only for a short-term.

“It may increase volatility in the capital account,” Nomura stated, as quoted by Kontan, Monday (23/07).

The Singapore-based asset management company said Bank Indonesia had removed the BI certificate due to the potential volatility increase in the capital account. In the past, this volatility pushed Bank Indonesia to implement a holding period that was deemed as not market-friendly.

Furthermore, the reactivation of 9-month and 12-month BI certificate poses a risk of investors shifting to this instruments from the government bonds. As a result, it potentially hurts the state budget financing.

“Overall, we think this plan is a short-term solution and will prove counter-productive,” Nomura added.

Indonesia’s central bank issues 9-month and 12-month BI certificate on Monday (23/07) to boost capital inflow. The auction received the offer of Rp7.88 trillion for the 9-month BI certificate and a Rp6.35 trillion for the 12-month BI certificate. The central bank only executed Rp4.18 trillion for the 9-month BI certificate and a Rp1.79 trillion for the 12-month BI certificate.

Meanwhile, the Coordinating Minister for Economic Affairs Darmin Nasution snubbed concerns over the higher capital account volatility. He said BI certificate is only additional instruments that usually not increase the capital account volatility.

He supported the BI‘s move to add their monetary instruments. “The yield of BI certificate that is 9-month and 12-month is simpler,” he added.

Bank Indonesia‘s Economic and Monetary Policy Department Head Aida S. Budiman earlier said BI certificates auction will increase the number of domestic financial instruments available amid global economic uncertainty.

“The investors tend to adjust their portfolio so that we need to add the available instrument as well as to deepen the financial markets,” she added.

Bank Indonesia’s Governor Perry Warjiyo earlier stated the Bank Indonesia certificate will attract the foreign investors to enter Indonesia’s financial market, in addition to the interest rate hike.

The central bank has gradually removed the Bank Indonesia certificate since 2016 and planned to remove it altogether and shift to treasury bills as monetary instruments by 2024. Bank Indonesia last conducted 9-months and 12-months Bank Indonesia certificate in December 2016.