BI forex measures deemed inadequate by analysts

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)