It is always
interesting to research the phenomenon of capital flow in a
country. Some of the predicted benefits of capital inflow are the raise of domestic investment (Mileva, 2008); increase in liqudity and
reduce the cost of capital (Bekaert and Harvey, 2000); and also lead to promote economic growth (Ito, 1999). However, capital inflow is also feared to be the sources of increasing probability of having
lending boom (Penalver, 2003); increasing liabilities in the future owed by the related countries
(Eichengreen, 2006); and threat of capital
reversal particularly in the form of porfolio investment (Ostry, et al, 2010).
Private Portfolio Liabilities (PPL) represent a measure of capital inflow
(from non-resident) in the form private portfolio ownership in a period of time
(annual in the graph); further term of PPL will represent this data. In case of
Indonesia, during 1993 to 2011 PPL and GDP growth share
almost at a similar trend, although year-by-year movement of the two seems
differ with PPL as the more volatile one. From 1993 to 1996, raising of PPL
also followed by the raising of GDP growth, vice versa. From 1997 to 1998, a
currency and debt crisis arise which in turn drag the economy to its largest
decline since the 1960s. From 1999 to 2004, PPL took a slower pace to recover
from 1998 crisis than the economy. When the economic growth rate was already up
to 5% in 2000, PPL have finally reached a positive 1 billion US Dollars in
2002. In 2005, a distress in Indonesian economy in the form of increasing
gasoline selling price and Rupiah large depreciation made the PPL decline,
while GDP growth still hanging around 5.7%. Between 2006 and 2007, a booming of
PPL did not encourage a large GDP growth movement. This is one of the sign of a
potential sudden reversal. In 2008, following a global financial crisis, a
correction was made, while 300 million US Dollars of capital outflow from the
previous Portfolio holders in 2008 followed by a slowing 4.6% GDP growth in the
next year. Until 2011 PPL have shown a strong upward movement in the middle of
spreading crisis (to Europe), while GDP still maintain its regular 6.4% growth.
Assume that GDP growth can represent the real performance of economy as well as
PPL represent the expected performance of economy, then the gap between them
might be a sign of a future correction.
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