Soedradjad gives elements in economic achievement<\/p>\n
The following article is based on a paper presented by the
\nGovernor of Bank Indonesia, Soedradjad Djiwandono, at the annual
\nbankers' meeting in Jakarta on Jan. 19, 1995. This is the first
\nof a two-part article.<\/p>\n
JAKARTA: The economic indicators point to strong economic
\ngrowth in 1994, which reached about 7 percent. This is
\nsignificantly higher than the 6 percent target for the first year
\nof Repelita (Five-Year Development Plan) VI. Inflation, however,
\nwas registered at 9.24 percent, which was still above the
\nRepelita VI target of 5 percent per annum, but slightly less than
\nthe year before. The current account deficit, though up by a
\nsmall margin, remains within tolerable limits at about 2 percent
\nof the GDP. Foreign reserves are quite ample, having increased
\nduring 1994, and are now sufficient to pay for around five months
\nof imports. What are then, the factors that have brought about
\nthis heartening macroeconomic performance?<\/p>\n
On the domestic front, the economic recovery that began in mid
\n1993 continued through 1994. Growth in private investment
\nstrengthen while growth in private consumption remained strong.
\nThe remarkable upswing in foreign and domestic investment
\napprovals is an indication of just how keen investors are. It is
\nalso a reflection of the strong confidence of domestic and
\nforeign business community in Indonesia's economic prospects. A
\nkey factor in this success story is the 1994 deregulation in the
\nreal sector, which opened the doors considerably wider to
\ninvestment. This went hand-in-hand with government efforts to
\nmaintain a stable business climate through the consistent
\napplication of prudent fiscal and monetary policies. These
\nfactors have converged to generate stronger economic activity in
\nalmost all sectors, with manufacturing and construction in the
\nlead. Dynamic and robust economic activity has increased the
\nincomes, and this in turn has fostered greater consumption. Last
\nyear we witnessed a strong upturn in market demand for a broad
\nrange of consumer goods.<\/p>\n
Our economic growth has also been driven by strong external
\ndemand. In 1994, the economic recovery gathered pace in the
\nindustrialized countries including the United States and some
\nEuropean countries, and in some countries with have strong trade
\nrelations with Indonesia, such as ASEAN and East Asia. The
\nworldwide economic recovery has not only provided a generous
\nboost to world trade, but has also increased prices of several
\nagricultural and mining products. Oil prices, which had declined
\nsince 1993, began to rise in the second quarter of 1994.<\/p>\n
However, relatively high economic growth in the United States
\nand the UK has encouraged their central banks to raise interest
\nrates in an effort to reduce the threat of inflation. As you all
\nwell aware, the Federal Reserve raised the Fed Funds rate several
\ntimes in 1994 to curb inflation. In one year, the Fed Funds rate
\nwent up from 3 percent to 5.5 percent. This has generally had
\nrepercussions on interest rates the world over.
\nLadies and gentlemen,<\/p>\n
One interesting point I would like to mention about
\nIndonesia's economic growth last year was that domestic forces
\ncame to the fore. There was a surge in consumer and business
\ndemand for a wide range of goods and services, which put upward
\npressure on domestic prices. Another indication of these forces
\nwas the pressure on the current account, as the demand encouraged
\nimports to grow at a faster rate than exports.<\/p>\n
Rising inflation rate in 1994 was associated with difficulties
\nin the supply of some strategic goods. Food prices, and
\nparticularly rice, went up because of higher floor prices for
\nunhusked rice and fertilizers introduced early in 1994. Harvest
\nfailures in some provinces as a result of the prolonged dry
\nseason pushed prices even higher. An added factor was the
\nimprovement in world market prices for some of our export
\ncommodities, such as palm oil and coffee. This apparently had
\nsome effect on domestic food prices. Another significant
\ncomponent in inflation was higher housing prices, reflected in
\nthe rising prices of cement, bricks, wood and other building
\nmaterials. This sharp increase fueled by the robust growth in the
\nconstruction sector.<\/p>\n
Confronted by these situations, the government responded by
\nadopting measures designed to strengthen supply and curb demand.
\nOn the supply side, the government reinforced supplies of those
\ncommodities by the market operation by Bulog. To control demand
\nfor goods and services, monetary policy was adjusted to hold
\nliquidity in the economy at the appropriate level to sustain
\nongoing economic activities.<\/p>\n
Growth in the money supply and domestic liquidity were kept
\nwithin appropriate level. According to the latest available
\nfigures, I can say that money supply (M1) grew by 23,2 percent
\nin 1994, while economic liquidity (M2) grew by 19,7percent. Bank
\nlending also behaved in a similar manner, rising by a reasonable
\n23,1 percent.<\/p>\n
As to be expected with the upswing in economic activity, there
\nwas a perceptibly strong demand for credit from the business
\ncommunity and the public. However, growth in bank deposits has
\nlagged behind the expansion in credit. This gap between the
\nsources of funds and credit has pushed up domestic interest rates
\nin recent months. Another key factor was also the upward movement
\nin international rates, particularly U.S. interest rates. Of
\ncourse, in the present climate of deregulation, Bank Indonesia no
\nlonger sets bank interest rates. It is the banks themselves that
\ndetermine deposit and lending rates as they see fit according to
\nmarket conditions and prospects. However, I would like to
\nemphasize at this point that Bank Indonesia will not remain idle
\nif broader interests such as economic and monetary stability are
\nthreatened. Adjustment of interest rates according to changes in
\neconomic fundamentals is something that banks can and obviously
\nmust do. However, if banks hike rates unreasonably or do so
\nsimply to jump on a bandwagon, their actions will undermine the
\nmarket and will not be consistent with our economic interest. In
\nthe end, the banking system itself would also suffer. Therefore,
\nwe should not allow such things to happen.<\/p>\n
Banks should plan their commitments on extending credit
\naccording to their ability to raise deposits, and thus keep
\ncredit and funds in reasonable proportion. Therefore, in 1995
\npart of Bank Indonesia's tasks as the monetary authority will be
\nto keep a vigilant eye on bank funds and credit commitments. In
\nparticular, we will be monitoring the way in which funds and
\ncredit commitments are managed, and how banks maintain a proper
\nbalance between the two from the standpoint of prudential
\nprinciples and sound bank management.<\/p>\n
In early 1994, our economy once again suffered a setback as
\nthe speculative outflow of dollars sparked by rumors of an
\nimpending devaluation of the Rupiah or similar drastic action.
\nSuch rumors flare up from time to time, often from unidentifiable
\nsources. Unfortunately, it often happens that many people,
\nincluding sophisticated citizens, believe these reports causing
\nthem to behave in a less rational manner. Sometimes such rumors
\noriginated from foreign sources based on their forecast on our
\neconomy which are often not based on accurate information. These
\nrumors are fanned when one or more indicators of our economic
\nperformance provides a more pessimistic picture than had been
\nexpected.<\/p>\n
In the first few months of last year, there were some
\ndiscouraging developments. Oil prices were weakening, non oil-gas
\nexports were not growing with the same vigor as in the year
\nbefore, and inflation was rising. There was an announcement that
\nthe Budget run a deficit that would have to be covered by
\nDevelopment Budget Reserves (CAP). Things took on a more
\ndiscouraging tone when worker unrest and demonstrations took
\nplace in several regions. In some regions, there was a disruption
\nof public order and normal economic activities. The fact that
\nthese various events all occurred around the same time lent some
\ncredence to these devaluation rumors. The result was a massive
\ndollar buying spree that began in mid-February. When it started,
\nthe amounts involved were not high, but shortly thereafter dollar
\nbuying took off forcefully and turned into capital flight. The
\nsituation did not let up until June 1994. Public behavior
\nreturned to normal after the rumored events failed to
\nmaterialize. In August 1994, there were signs that capital had
\nbegun to flow back into the country, and many began to sell their
\nforeign currency holdings to Bank Indonesia. On this occasion I
\nwould like to confirm the stance taken by the government and Bank
\nIndonesia as well-that we decided to counter the rumors. Past
\nexperience have shown that we were able to manage such rumors
\nowing, of course, to the actual condition of our economy.<\/p>\n
At various occasions in the past I have also said that we have
\nsucceeded in reducing our dependence on oil revenues. The rupiah
\nexchange rate is now no longer closely linked to changes in oil
\nprices. About 76 percent of our exports are comprised of non oil-
\ngas products. A much smaller proportion of government revenues
\ncome from oil and gas taxes. About 78 percent of total domestic
\nrevenues now come from non-oil sources. Given these factors,
\nthere should be little cause for alarm over the impact of a drop
\nin oil prices for government revenues or the balance of payments.
\nI think that it is time for our people to display greater
\nconfidence on our macroeconomic management and not be so easily
\ntaken in by either local or foreign rumors attempting to link
\ndevaluation to flagging oil prices.<\/p>\n
The overall balance of payments for 1994 remained strong,
\ndespite some discouraging developments in the first half of the
\nyear. Oil exports, which had weakened in the early part of the
\nyear, began to pick up in the second quarter. Non-oil exports,
\nwhich had also shown signs of stagnation, embarked on a recovery
\nin the second quarter, among others, because the prices of our
\ncommodities increased. Increasing domestic demand led to sharp
\nrise in imports. The current account deficit posted about US$ 1.8
\nbillion in the first quarter of 1994, and then subsided to US$
\n1.5 billion in the second quarter.<\/p>\n
As regards the exchange rate, Bank Indonesia has consistently
\nimplemented a managed float to maintain a realistic exchange rate
\nfor foreign trade and domestic monetary management. Bank
\nIndonesia has also amended regulations to stimulate the foreign
\nexchange market and provide money market players with greater
\nroom for trading. We have increased the spread between the dollar
\nbuying and selling rates from Rp 20 to Rp 30, and introduced new
\nregulations for the net open position.<\/p>\n
It is worth noting that the wave of dollar speculation had no
\nmajor impact on foreign reserves. The outflow took place during a
\nperiod of high foreign exchange earnings from oil exports and
\nalso strong inflows from the government's offshore borrowing.
\nBank Indonesia had also anticipated this capital outflow and
\nprepared itself through prudent management of foreign reserves
\nwhich accumulated during the high inflows that occurred close to
\nthe end of 1993. In fact, there was no heavy pressure either on
\nbalance of payments or government revenues. With all these ups
\nand down, the year ended with foreign reserves up at US$ 13.2
\nbillion at the end of 1994, sufficient to cover five months of
\nimports.<\/p>\n
In 1994 we also posted considerable progress in the banking
\nsystem. Since Pakmei (May deregulatory package) 1993, banks have
\nbeen busy with consolidation to bring themselves into line with
\nthe new regulations. These essentially comprise regulations for
\nthe implementation of Act No.7 of 1992 concerning Banking. Growth
\nin banking activities and compliance with the prudential
\nregulations over the past year shows that banks have managed the
\nconsolidation process well.<\/p>\n
At the end of September 1994, compliance with the Capital
\nAdequacy Ratio (CAR) was 92.9 percent for all categories of
\nbanks. Only 4.6 percent of all banks had a CAR of less than 5.0
\npercent. Banks have generally raised their CARs by increasing
\npaid up capital. This is the most beneficial route to take for
\nthe long term survival and growth of the bank.<\/p>\n
Bank's balance sheet strengthened in 1994, as shown by various
\nkey indicators, including the capital assets ratio, which
\nregistered an improvement over the previous year. The improved
\nperformance is consistent with the fact that more banks have
\ncomplied with the CAR, as I mentioned earlier.<\/p>\n
Another encouraging development in our banking system is the
\nimprovement in the quality of credit. Collectibility has improved
\nwith the proportion of credit rated as current on the rise, while
\nsub-standard and doubtful credit is on the decline. Although
\nproblem loans have subsided, stronger efforts to resolve them
\nshould get top priority. The general improvement in the
\ncollectibility of earning assets is also reflected in other
\nindicators, as shown by improved profitability related to higher
\nreturn on assets (ROA) and return on equity (ROE).<\/p>\n
In the era of development, our domestic banking system also
\nbears a responsibility to promote equity. In order to support
\nequity in development, last year banks achieved considerable
\nprogress in extending credit for small-scale enterprises. About
\n26 percent of total bank lending is now comprised of small-scale
\nenterprise credit. Added to this, Bank Indonesia has identified
\nmany potential projects that deserve finance with small-scale
\nenterprise credit. The identified projects are now either in the
\npre-feasibility study or feasibility study stage, and include
\n\"core-plasma\" partnerships in all sectors. To further promote
\nrural economic growth, I suggest that commercial banks continue
\nto expand their cooperation with rural banks in order to promote
\nfurther small-scale enterprise credit, as rural banks generally
\nwork closely with the small-scale business, and these entities
\nhave achieved strong growth.<\/p>\n
Similarly, we should continue working together on developing
\nthe Bank Low-Income Group Linkage Program (PHBK). This scheme is
\ndesigned to provide low-income groups with access to banks
\nservices. The program offers a solution for some groups that
\npreviously had trouble gaining access to banking services.
\nMeasures designed to promote small-scale business and development
\namong low income groups will be of tremendous benefit to the
\npoverty alleviation program, which has become an important
\nGovernment concern that we are committed to overcome during the
\nSecond Long Term Development period.<\/p>\n
Besides the progress achieved, we also have to admit that our
\nbanking system still faces significant challenges. One of these
\nis the need to improve banks' internal control. Recent
\nexperiences have shown that the existing problems of our banking
\nindustry were caused by the banks' weak internal control. As I
\nhave mentioned briefly, collusion and fictitious exports have
\nrecently been in the limelight. These issues pose a challenge for
\nthe banking system to put its house in order, and improve
\nadministration and internal control. As for the issue of
\nfictitious exports, although the banks' role is limited to
\nchecking that all the required documents exist and are valid,
\nmore is now asked of the banks to detect fraudulent practices
\nthat might occur in the international trade. There is a greater
\npossibility of fictitious exports if there is collusion between
\nexporters and banks' officials. Collusion is a problem that
\nconcern the morals and integrity of the persons involved. If it
\ntakes place within the banking system, it could have devastating
\nrepercussions for the bank involved.<\/p>\n
In addition, I would also like remind you that we all need to
\npay attention to the issue of compliance with the legal lending
\nlimit. Although more and more banks have complied with the legal
\nlending limit, there are still many that have not. As we are all
\naware from our experience in recent year, a large proportion of
\nproblem loans and other bank difficulties have their origin in
\nthe violation of the legal lending limit. The legal lending limit
\nor similar regulations is universal and exist in many countries,
\nas this regulation is a strategic concept in assuring the
\nsoundness of the banking system. Compliance with the legal
\nlending limit will make it possible to build a healthier banking
\nsystem. Another reason for the legal lending limit in our country
\nis to promote more equitable development by allowing more people
\nto have access to credit. For these reasons, the government is
\nvery serious about enforcing the legal lending limit, and Bank
\nIndonesia will closely monitor.<\/p>\n
As we know, last year was marked by strong credit expansion.
\nLooking at the issue on a sectoral basis, there has been very
\nrapid growth in credit for services, which has been fueled by a
\nstrong surge in lending for construction and housing, including
\nreal estate projects. We all need to pay attention to this area,
\nas any over-concentration of credit in one activity or business
\ngroup may increase the bank's exposure. This is especially valid
\nin the case of property, which as shown by the experience of many
\ncountries to be highly susceptible to market saturation. I would
\nlike to emphasize again that the array of risks not only has
\npotential repercussions at the level of the individual bank, but
\nalso has a systemic impact on the banking community as well as
\nmonetary stability.<\/p>\n
To create the sound, efficient and competitive banking system
\nthat we all desire, we all have to work harder to deal with
\nproblem loans and improve the general quality of bank portfolios.
\nRegarding problem loans, Bank Indonesia is working on
\nstrengthening measures that it has already introduced. These
\nmeasures cover three main areas. First, there is assistance for
\nbanks in dealing with their existing problem loans. Second, we
\nwill take preventive measures to limit the occurrence of new
\nproblem loans. Third, we are going to provide guidance and
\nsupervision for banks in trouble due to problem loans. To speed
\nup the settlement of problem loans, there is more work that needs
\nto be done to improve the effectiveness of the legal system. Bank
\nIndonesia has been working with the agencies that are involved in
\nthis area, such as the Supreme Court, the Ministry of Justice,
\nthe Attorney General Office, the Ministry of Finance, the
\nNational Land Agency, and the Agency for Settlement of Government
\nClaims, Further measures will also be adopted to strengthen this
\ncooperation.<\/p>\n
Measures adopted to deal with problem loans through State Bank
\nCredit Supervision Teams (TSKBP) at state banks and Special Units
\n(STK) at private banks will be further reinforced. In the case of
\nprivate banks, the Special Working Team at Bank Indonesia, whose
\ntask is to monitor the Special Units at the bank level, will also
\nbe strengthened. These measures are expected to enable banks to
\novercome their problem loans, and will also improve the
\nmonitoring of this process. Furthermore, Bank Indonesia is also
\nworking with other agencies on the possibility of establishing a
\nCredit Subrogation Agency for handling problem loans at state
\nbanks. Bank Indonesia is also looking into the possibilities for
\nphased write-offs of bad debt from the private banks' balance
\nsheet.<\/p>\n
Of course, it is also necessary to prevent new problem loans,
\nand in this area Bank Indonesia has redesigned Credit Policy
\nGuidelines (PPKP), updated the credit information system and bad-
\ndebt list, and improved the internal audit function. Bank
\nIndonesia also requires banks to provide a working plan for the
\nbank and a report from the Board of Commissioners on lending to
\ndebtors affiliated with the owners or management of the bank.
\nSimilar reports are also required on lending to large debtors.
\nFurthermore, Bank Indonesia will soon issue the criteria for
\nbanning persons from becoming shareholders in banks or members of
\nthe board of directors. These criteria are expected to helps
\nbanks in keeping out people whose involvement could threaten
\nsoundness or even survival of the bank.<\/p>",
"url": "https:\/\/jawawa.id\/newsitem\/soedradjad-gives-elements-in-economic-achievement-1447893297",
"image": ""
},
"sponsor": "Okusi Associates",
"sponsor_url": "https:\/\/okusiassociates.com"
}