Falling interest rate<\/p>\n
Bank Indonesia has steadily lowered its benchmark interest
\nrate since early last year in a bid to fuel economic recovery and
\nto prod banks to increase new lending to liquidity-starved
\nbusinesses.<\/p>\n
The easier stance on money has been made possible by
\nmacroeconomic stability, which has been strengthening on the back
\nof a stronger rupiah and low inflation.<\/p>\n
The consumer price index has also been falling steadily to
\nbring down inflation to as low as 5.06 percent last year, from
\n10.03 percent in 2002 and 12.56 percent in 2001.<\/p>\n
This low inflation rate can be attributed primarily to the
\nappreciation of the rupiah, which has itself been fueled by a
\nsharp reduction in country risks -- as indicated by international
\ncredit rating agencies and in steadily increasing foreign
\nexchange reserves, portfolio capital inflows and a weakening
\ndollar.<\/p>\n
Macroeconomic stability is expected to increase further this
\nyear, as there seems to be no big risk of a sharp deterioration
\nin key economic indicators, despite the national elections
\nbetween April and September.<\/p>\n
Barring any major security disturbances or political violence,
\nthe rupiah will most likely continue to appreciate or, at worst,
\nremain stable at its current rate of around Rp 8,500 to the
\ndollar. In turn, this will create a virtuous cycle in the economy
\nand push down inflation further.<\/p>\n
The government conservatively projects an average rupiah rate
\nof Rp 8,600, inflation at 6.5 percent and benchmark interest rate
\nat 8.5 percent for this year, and the market seems to be
\ncomfortable with these assumptions.<\/p>\n
Bank Indonesia (BI) also seems highly optimistic that
\ninflation will continue to be well controlled throughout 2004.<\/p>\n
Over the past five weeks alone, the central has decreased its
\nbenchmark interest rate from 8.3 percent in December to 7.86
\npercent last month, and may further cut its interest rate at the
\nweekly auction of its promissory notes today.<\/p>\n
However, the very slow response from the banking industry to
\nBI's strong signal of an easier money stance is worrying. Banks
\nstill seem to be facing great difficulty in extending its excess
\nliquidity to lending. For example, when Bank Indonesia lowered
\nthe interest rate of its promissory notes from 8.06 percent to
\n7.86 percent during the weekly auction on Jan. 28, banks still
\nbought more than Rp 55 trillion of the notes.<\/p>\n
Most banks must also find it very difficult to extend its
\nfunds to corporate lending; otherwise, they would not have
\nforfeited a potential earning of 4 to 7 percent. This is the
\ndifference between interest revenues banks will get from
\ncommercial loans -- between 11 and 15 percent -- and from BI
\npromissory notes -- 7.86 percent.<\/p>\n
Banks apparently remain hesitant about accelerating the pace
\nof corporate lending, due to high credit risks turning sour and
\nthereby threatening their capital standards.<\/p>\n
But this condition is inimical to economic recovery. If banks
\nremain highly averse to new lending and instead prefer to invest
\nin financial market instruments such as mutual funds, government
\nbonds, BI deposit certificates, treasury bonds and inter-bank
\nmarket instruments, economic recovery will remain weak.<\/p>\n
Understandably, banks should be extra careful in making big
\ncorporate loans, because most big businesses have yet to complete
\nrestructuring their operations and bad loans.<\/p>\n
However, there are now thousands of small and medium-scale
\nenterprises (SMEs) that are starved of investment and working
\ncapital loans. The major banks, despite their acute lack of
\nexpertise in dealing with SME borrowers, could channel excess
\nliquidity to help these businesses through cooperation with
\nsecondary banks that have long experience in lending to SMEs.<\/p>\n
Lending to SMEs, which make up most of the business sector and
\nemploy millions across the country, will not only speed up
\neconomic recovery, but will also provide banks with bigger
\nearnings -- with the eventuality that some medium-scale
\nbusinesses will become big enterprises and prime clients for big
\nbanks.<\/p>\n
________<\/p>", "url": "https:\/\/jawawa.id\/newsitem\/falling-interest-rate-1447893297", "image": "" }, "sponsor": "Okusi Associates", "sponsor_url": "https:\/\/okusiassociates.com" }