BI forex measures deemed inadequate by analysts

JAKARTA (JP): Bank Indonesia's (BI) latest move to control bank foreign exchange deposits and liabilities might be ineffective in preventing a further plunge in the rupiah as well as in restoring confidence in the banking sector, analysts have said.

"It's meaningless," Hartojo Wignjowijoto of the Asia Pacific Economic Consultancy said yesterday.

He said the central bank's move to impose ceilings on bank foreign exchange deposits and liabilities was a mere public relations effort to show that Bank Indonesia, the central bank, was "doing something".

The central bank Sunday announced ceilings on bank foreign exchange deposits and foreign exchange non-trade and trade- related liabilities, including letters of credit.

BI and the Indonesian Bank Restructuring Agency (IBRA) also jointly announced ceilings on credit growth and interest rates as initial measures to restructure the Indonesian banking system.

The new measures, however, were not meant to abandon the country's free foreign exchange regime policy, said Mukhlis Rasyid, the central bank's managing director.

He explained the move was to help revive the ailing banking sector as well as to prevent irregularities that might result from the government's decision to guarantee bank obligations to depositors and creditors.

Edwin Syahruzad, a banking analyst at securities firm PT Pentasena Arthasentosa, said the new measures were expected to minimize the high demand for U.S. dollars, which would, in turn, limit the rupiah's fall against the U.S. greenback.

"The policy will only create an outflow of dollars," Hartojo said, pointing out that people would no longer put their dollars in domestic banks.

"They (BI) think it is the bankers who control the market. Well, they're wrong," he said.

He stressed the policy would only strengthen poor public confidence in domestic banks.

Other analysts said they were not surprised by the new bank controls.

Ferry Hartoyo, a banking analyst at PT Vickers Ballas Tamara, said that even without the new measures, demand for dollars and loans had already dropped because of the current slump in the economy.

He said there were signs of slowing importer demand for opening letters of credit while corporations were not servicing their foreign debts.

"Everyone is in a consolidation process. So demand for loans is also slowing. There will be a contraction this year," he said.

"The new measures will only help a little in restoring confidence in the banking sector," he said, adding that despite the government's deposit guarantee, people were still keeping their money either at state or foreign banks, or under their mattresses.

He said the important factor in reviving the ailing banking sector was to find ways to solve its huge bad debt problem. "The policy on this matter is not clear," he said.

"The bad loan problem is much more critical than the foreign corporate debt crisis," he said.

He explained that if the bad loans were not recovered, banks would remain financially unsound. "The banks have been operating with income interest levels less than the interest rate being paid to customers," he said.

Hartojo agreed. "BI has been inept in dealing with the real problems," he said.

He explained that the central bank had only solved a third of the factors creating the current financial crisis and that the International Monetary Fund's solutions were inadequate.

"The IMF programs only serve the rich countries' interests," he said.

He said BI's weak monetary policy had been a major cause of the current banking problems, pointing to special credit privileges given to well-connected businessmen, legal lending limit violations, corruption, low economic capacity and high domestic consumption with a weak distribution sector.

Following the sharp rupiah depreciation and the liquidation of 16 banks in November, confidence in the banking sector has waned. The public withdrew deposits and foreign banks became increasingly reluctant to accept letters of credit from their Indonesian counterparts. The economy almost came to a halt.

As an initial step to rebuild confidence in the banking sector, the government announced last week that bank obligations to creditors and depositors would be guaranteed.

IBRA was also introduced with the mission to oversee banking restructuring programs. (08)