Bank Indonesia soaks up Rp 29t from circulation

Bank Indonesia soaks up Rp 29t from circulation

JAKARTA (JP): Bank Indonesia (BI) has issued Rp 29 trillion
(US$3.6 billion) in promissory notes (SBIs) to investors as of
yesterday following the central bank's March 23 increase in
benchmark interest rates.

Some Rp 6 trillion of the total is in the hands of foreign
investors, with the remainder being held by domestic banks and
pension funds, Muhammad Rovky, BI's money market deputy director,
said yesterday.

"This is quite an increase compared to the amount before the
rate increase," he told reporters at a media conference to
promote SBIs as an alternative investment vehicle for individual
investors.

SBIs outstanding as of early March totaled Rp 8.4 trillion.

Rovky said most investors held SBIs with seven-day and one-
month maturity rates.

The central bank, however, kept its SBI rates unchanged
yesterday against market expectations.

The rates were increased March 23 to 43 percent for one-week
SBIs, 44 percent for two-week terms, 45 percent for one month, 40
percent for two months, 30 percent for three months, 20 percent
for six months and 18 percent for one year.

The move is designed to soak up excess liquidity because the
country's money supply expanded sharply in December and January
when BI pumped liquidity into many banks affected by the economic
crisis to keep them afloat to finance subsidies for staple foods,
medicines, fuel and electricity. In January alone, the money
supply increased almost 27 percent.

BI director Miranda Gultom said that in accordance with the
supplementary reform programs agreed to with the IMF recently,
any rate increase would depend on the direction of developments
in the rupiah's exchange rate and the inflation rate.

"We won't rule out the possibility of higher rates in the near
future, but we won't exclude the possibility of lower rates
either," she said.

The latest agreement with the IMF requires Indonesia to
maintain a tight monetary policy to control inflation and
strengthen the rupiah's exchange rate to an acceptable level.

The projected inflation rate for the 1998/1999 fiscal year
beginning this month is 17 percent. The cumulative inflation rate
for the 1998 calendar year, however, is projected to reach 50
percent. The rupiah is expected to eventually strengthen to about
6,000 to the U.S. dollar from a current level of about 8,000.

Miranda said BI would emphasize the use of its SBIs as an open
market instrument to control domestic liquidity.

"That's why we would like to ask for the cooperation of the
mass media to promote this instrument to the public, including
foreigners," she said.

She said most individuals still thought that only banks and
other institutional investors had access to SBIs.

"That's not entirely wrong, because in the past, when capital
inflows were still high, we tended to restrict the sales of
SBIs," she added.

The SBIs are available in denominations ranging from Rp 25
million to Rp 10 billion with maturity rates varying from one day
to one year, the central bank said in a media statement.

It said individual investors could buy or sell SBIs through an
auction mechanism arranged by 20 banks appointed as primary
dealers.

SBIs can also be traded in the secondary market.

"So it's a liquid instrument," said Rovky, adding that the
central bank could also intervene in the market whenever
necessary by repurchasing certificates which have yet to mature.

"Investors should consider SBIs as an investment alternative
to diversify their risk," he said, pointing out that the central
bank's investment product was relatively risk free.

The monetary crisis and mounting bad debts have sent many of
the country's banks into turmoil, destroying public confidence in
the sector.

"We can't ignore the reality that confidence in the banking
sector has dropped to its nadir due to the economic crisis," said
BI deputy director Hartadi Sarwono.

He explained that this had prompted depositors to withdraw
their savings from local banks and transfer them to foreign banks
or put them under their mattresses, creating a severe lack of
liquidity in the banking system.

Some funds have returned to banks after the government
increased SBI rates and provided a blanket guarantee for
depositors and creditors. (rei)