Capital Flows in Indonesia: the Behavior, the Role, and Its Optimality Uses for the Economy

The abundance of global liquidity post the global crisis resulted in a huge amount of international capital flows to Government Securities (GS) market. Besides useful, the flow of foreign capital potentially give a risk reversal that may leads to instability in domestic financial market. This paper analyzes the determinant of foreign investors including the risk and returns, both from domestic (pull factor) as well as from global (push factor). The result shows that the push factor was instrumentally influence the behavior of foreign investors in the GS (Government Securities) market. For long-term investors, their behavior to place their funds in GS market is influenced by push factor, but not significantly affected by the pull factor. However, for short-term investors, both pull and push factors influence their investment decisions. In addition simulation results indicate that in the future, the prospect of foreign investors in the securities market still faces challenges, particularly from the relatively high volatility as a result of the shock sensitivity of foreign investors on shock that can happen in the uncertainty in the international financial markets due to ongoing debt crisis resolution in developed countries.Concerning these findings, Bank Indonesia and the government needs to maintain and manage the returns and risks of domestic investment on a more competitive and relatively low level by maintaining the strength and resilience of the domestic economy and financial stability. Keywords : Foreign Exchange, International Lending, Corporate Finance. JEL Classification : F31, F34, G