Rich Indonesians to keep pouring cash offshore

By Harry Suhartono

SINGAPORE (Reuters) - Rich Indonesians are expected to keep stashing their cash offshore, with strict domestic financial regulations and a search for more secure returns likely to favor private banks in neighboring Singapore, bankers said on Wednesday.

Many wealthy Indonesians are already banking offshore with major private bankers such as Citigroup (C.N: Quote, Profile, Research, Stock Buzz), HSBC (HSBA.L: Quote, Profile, Research, Stock Buzz) and Merrill Lynch MER.N in Singapore or Hong Kong, and Indonesia is unlikely to loosen laws that limit their options to invest.

"It is security, it is diversification, and it is access to the best end-products that they are getting over here," Rahul Malhotra, head of Asia Pacific Advisory at Merrill Lynch, said at the Reuters Wealth Management Summit in Singapore.

"From a private banking context where we are dealing with the wealthy, offshore is going to be a better proposition than anything else," he added.

Merrill Lynch, which focuses on individuals with at least $1 million worth of investible assets, is tapping wealthy Indonesians from its operation in Singapore and has no plan to open an onshore operation in Southeast Asia's biggest economy.

Merrill hired a team of four private bankers from Citigroup earlier this year who will be based in Singapore and look for business from Indonesian billionaires. Indonesia's central bank and capital market watchdog Bapepam have imposed tight restrictions on banks and financial institutions, limiting their flexibility to invest in risky assets.

"Say you are a rich Indonesian who wants to buy Brazilian or Turkish bonds because you want to pursue a very high yield, you cannot buy them through Indonesian banks, you have to go to private banks in Singapore," Fauzi Ichsan, economist at Standard Chartered in Jakarta told Reuters.

The regulation has been seen as restricting the growth of the wealth management industry in Indonesia, but it has been positive for the overall banking sector since it has spared it from the initial fallout from the U.S. subprime mortgage meltdown, which has fueled a global financial crisis.

Analysts and industry experts say that many wealthy Indonesians, especially ethnic Chinese, have increased the placement of their financial assets in Singapore especially since the Asian financial crisis and political turmoil in 1998.

The latest Capgemini report shows there were an estimated 23,000 high net worth individuals in Indonesia, with total assets of $80 billion. The number of high net worth individuals grew from 17,000 two years ago, after a boom in commodity and energy prices and in the local stock market.

Many wealthy Indonesians also have homes in Singapore and some have listed their companies there.

Other than product diversification, industry experts said security and tax incentives in Singapore will be two key factors for rich Indonesians in placing their money offshore.

"Singapore doesn't have withholding tax on interest so it's the key thing. The second issue is the (lack of) flexibility in investing their money in a wide array of portfolios" in Indonesia, Fauzi Ichsan, economist at Standard Chartered in Jakarta told Reuters.

He also said some wealthy Indonesians prefer to have geographical diversification in order to avoid political and security risks, in a country still in the process of developing its democracy.

(Editing by Neil Chatterjee & Kim Coghill)