Mon, 22 Aug 1994

Banks may increase deposit rates to curb capital flight

JAKARTA (JP): Local banks are likely to raise their deposit rates to curb a possible capital flight resulting from the increase in the interest rate of the U.S. dollar, business analysts estimate.

The analysts, however, predicted that the possible increase in the deposit rates would not fuel an increase in the lending rates.

Widigdo Sukarman, the president of the state-owned Bank Tabungan Negara (BTN), said over the weekend that the rise in the deposit rates in rupiah was inevitable in order to curb a possible capital flight.

Priasmoro Prawiroardjo and Rijanto expressed similar views on the possible increase in the deposit rates. Both banking analysts agreed that the rise would not fuel an increase in lending rates.

Early last week, the Federal Reserve raised both the discount rate, which it charges commercial banks for loans, and the federal funds rate, which banks charge each other for overnight money, by a half-percentage point in order to curb inflationary pressures.

The measure, which brought the discount rate to four percent and the federal funds rate to 4.75 percent -- the highest level since November 1991 -- fueled an increase in the prime lending rates charged by American banks to 7.75 percent per annum from 7.25 percent.

Other analysts, however, ruled out the possible capital flight given the slower appreciation of the American dollar against the rupiah.

"The current rates of time deposits (in rupiah) offered by local banks remain attractive even without any increases," said a foreign exchange dealer.

The deposit rates of the three-month time deposits offered by state-owned banks and major private banks, for example, have reached a level of between 10 and 11 percent per annum. Smaller banks offer even higher rates, ranging between 11 and 13 percent.

Not attractive

The foreign exchange dealer said investing the money in the American dollar was not as attractive as that in the previous years because of its slower appreciation against the rupiah in recent months.

The U.S. dollar's appreciation against the rupiah was less than two percent in the first seven months of this year, as compared to over two percent over the whole span of last year, around 3.5 percent in 1992 and another four percent in 1991.

Analysts estimated that the dollar's appreciation against the rupiah will not exceed three percent.

In a related development, business executives have warned local banks to maintain their lending rates at the present levels if a rise in the deposit rates is inevitable.

Tanri Abeng, the president of Bakrie and Brothers, said that a rise in the lending rates would cause a setback in the country's economy.

He said that it is not realistic to raise the lending rates from the present levels of between 15 and 17 percent as the current rates were already too high. (hen)