Bank borrowing curbed<\/p>\n
The central bank is strengthening its monetary management by
\ntoughening the restrictions on foreign borrowings by Indonesian
\nbanks. The measure is obviously designed to maintain prudent debt
\nmanagement to prevent further stresses on the balance of payments
\nand to ensure adequate capacity for future debt repayments.<\/p>\n
A March 26 ruling by Bank Indonesia obliges banks to allocate
\nat least 80 percent of their foreign borrowings of more than two
\nyears maturity as credits to export-oriented industries. The
\nregulation also requires banks to submit annual foreign borrowing
\nplans to the central bank and to report on the amounts of foreign
\nloans they receive. Foreign borrowings by banks are limited to a
\nmaximum 30 percent of their capital base.<\/p>\n
The country badly needs steady private capital flows, either
\nin the form of foreign direct investment and portfolio capital
\nand loan funds or borrowings to cover the large current account
\ndeficit. But these funds will only bring about benefits to the
\neconomy if macroeconomic management remains prudent, economic
\nfundamentals remain strong and foreign funds are used efficiently
\nin productive activities.<\/p>\n
Without these preconditions, the capital flows will make the
\ncountry highly vulnerable to periodical waves of currency
\nspeculations, usually triggered not by concerns over economic
\nfundamentals but wild political rumors. And the political rumor
\nmill is expected to be especially active this year.<\/p>\n
But a cap on offshore commercial borrowings, especially short-
\nterm bank borrowings, is still warranted in view of the sharp
\nincrease in the foreign debts of the private sector over the past
\nfive years. While the government's outstanding foreign debts have
\ndeclined steadily due to the prepayment of high-interest loans,
\nthe private sector's debts have risen sharply.<\/p>\n
In the 1994\/1995 fiscal year, for example, the service burden
\non government debts amounted to 17.7 percent of total export
\nearnings and on private-sector debts only to 13.4 percent. But
\nlast year, the debt-service ratio (against export earnings) for
\nthe private sector had reached 15.1 percent, compared to 14.1
\npercent for the public sector.<\/p>\n
The government therefore needs to curb banks' foreign
\nborrowings to maintain prudent debt management, and to prevent
\nthe current account deficit from worsening. The current account
\ndeficit is already predicted to reach 4 percent of gross domestic
\nproduct this year.<\/p>\n
But capping offshore loans is not enough. These loans should
\nbe used for productive activities and, in this context, the
\nexport industry is surely the most appropriate sector to receive
\nforeign loans. A larger export capacity would help maintain the
\ndebt service ratio against export earnings at a manageable level.<\/p>\n
Misallocation of foreign loans is particularly dangerous for
\nIndonesia. Foreign debts have reached $110 billion -- $56 billion
\nowed by the government and $54 billion by the private sector --
\nas of early this year. The danger is larger if the loans are used
\nfor such speculative purposes as property acquisition.<\/p>\n
Hence, the requirement for banks to allocate a minimum 80
\npercent of their offshore loans as credits to the export industry
\nwill ensure that any new borrowings will not cause major problems
\nin the future. This also will prevent the economy from
\noverheating.<\/p>\n
Indonesia's credit standing in the international market will
\ndecline if the debt service ratio and the current account deficit
\ncontinues to increase. This in turn, will increase the risk of
\nlending to the country, thereby making it much dearer to obtain
\nnew loans. The latest ruling will improve the central bank's
\ncapacity to maintain monetary stability, especially in this
\nheavily political year where periodic bouts of currency
\nspeculations are expected.<\/p>",
"url": "https:\/\/jawawa.id\/newsitem\/bank-borrowing-curbed-1447893297",
"image": ""
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"sponsor": "Okusi Associates",
"sponsor_url": "https:\/\/okusiassociates.com"
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