Bank borrowing curbed

Bank borrowing curbed

The central bank is strengthening its monetary management by
toughening the restrictions on foreign borrowings by Indonesian
banks. The measure is obviously designed to maintain prudent debt
management to prevent further stresses on the balance of payments
and to ensure adequate capacity for future debt repayments.

A March 26 ruling by Bank Indonesia obliges banks to allocate
at least 80 percent of their foreign borrowings of more than two
years maturity as credits to export-oriented industries. The
regulation also requires banks to submit annual foreign borrowing
plans to the central bank and to report on the amounts of foreign
loans they receive. Foreign borrowings by banks are limited to a
maximum 30 percent of their capital base.

The country badly needs steady private capital flows, either
in the form of foreign direct investment and portfolio capital
and loan funds or borrowings to cover the large current account
deficit. But these funds will only bring about benefits to the
economy if macroeconomic management remains prudent, economic
fundamentals remain strong and foreign funds are used efficiently
in productive activities.

Without these preconditions, the capital flows will make the
country highly vulnerable to periodical waves of currency
speculations, usually triggered not by concerns over economic
fundamentals but wild political rumors. And the political rumor
mill is expected to be especially active this year.

But a cap on offshore commercial borrowings, especially short-
term bank borrowings, is still warranted in view of the sharp
increase in the foreign debts of the private sector over the past
five years. While the government's outstanding foreign debts have
declined steadily due to the prepayment of high-interest loans,
the private sector's debts have risen sharply.

In the 1994/1995 fiscal year, for example, the service burden
on government debts amounted to 17.7 percent of total export
earnings and on private-sector debts only to 13.4 percent. But
last year, the debt-service ratio (against export earnings) for
the private sector had reached 15.1 percent, compared to 14.1
percent for the public sector.

The government therefore needs to curb banks' foreign
borrowings to maintain prudent debt management, and to prevent
the current account deficit from worsening. The current account
deficit is already predicted to reach 4 percent of gross domestic
product this year.

But capping offshore loans is not enough. These loans should
be used for productive activities and, in this context, the
export industry is surely the most appropriate sector to receive
foreign loans. A larger export capacity would help maintain the
debt service ratio against export earnings at a manageable level.

Misallocation of foreign loans is particularly dangerous for
Indonesia. Foreign debts have reached $110 billion -- $56 billion
owed by the government and $54 billion by the private sector --
as of early this year. The danger is larger if the loans are used
for such speculative purposes as property acquisition.

Hence, the requirement for banks to allocate a minimum 80
percent of their offshore loans as credits to the export industry
will ensure that any new borrowings will not cause major problems
in the future. This also will prevent the economy from
overheating.

Indonesia's credit standing in the international market will
decline if the debt service ratio and the current account deficit
continues to increase. This in turn, will increase the risk of
lending to the country, thereby making it much dearer to obtain
new loans. The latest ruling will improve the central bank's
capacity to maintain monetary stability, especially in this
heavily political year where periodic bouts of currency
speculations are expected.