BI needs no fresh capital

BI needs no fresh capital

KUALA LUMPUR (Reuters): Bank Indonesia will not need fresh capital as the government has decided not to recall Rp 164.5 trillion (US$23 billion) worth of bonds it had issued to the central bank, BI governor Syahril Sabirin said on Friday.

He welcomed the finance ministry's decision not to recall the bonds, which were issued to replace credits extended by BI to troubled commercial banks, and again criticized the findings of a recent state audit that he said damaged BI's credibility.

"With that amount of bonds staying intact in Bank Indonesia, we should not in my view need any recapitalization," he told Reuters in an interview.

Syahril, speaking on the sidelines of an annual meeting of Southeast Asian central bankers, said the International Monetary Fund also felt there was no need for a new injection of capital.

"One of the accountants was sent by the IMF to see briefly the accounts of Bank Indonesia. They are of the same conclusion, there is no need for recapitalization. They have said that unofficially," he added.

A recent government audit said BI's finances had been wrecked by the extension of trillions of rupiah in so-called liquidity credits to ailing banks during the height of the economic crisis.

Syahril disputed the findings of the audit.

"That was something that should not have happened. I really regret what the audit board has done to Bank Indonesia, especially the announcement that BI was in a big loss and needed recapitalization," he said.

"It was very unnecessary and there is no proof that we are in that kind of position."

Syahril voiced concern about recent outbreaks of violence in the Moluccas islands and the tourist resort of Lombok, but said that these had not yet had a major impact on financial markets.

"Up to now...the weakness of the rupiah has not been that significant...The efforts to stabilize the monetary situation at large has been successful in my view. The inflation rate is down, which also brought down the interest rate," he said.

The rupiah hit 7,495 per dollar on Thursday, its lowest level since the end of November, amid growing frustration at the government's failure to end unrest.

He said the weakness was linked to jitters about the violence but said he thought the rupiah should trade between 6,000 and 7,000 per dollar. Indonesia's recently unveiled budget for the April-December period assumes an exchange rate of 7,000/dollar.

Syahril said he did not expect Indonesian interest rates to decline much further, projecting that the rate on one-month central bank certificates (SBIs) could reach 10 percent or slightly lower by year-end.

The one-month SBI rate dipped to 11.16 percent at Wednesday's weekly auction from 11.30 percent the week before.

He said a slightly lower SBI rate was consistent with the central bank's inflation target and should ensure stability in the rupiah.

"We estimated that the inflation rate is going to be, excluding the impact of the administrative price increases, between three and five percent for the year 2000," he said.

"...With this relatively low inflation rate, if we have interest rates of 10 percent or a little bit below, we still have positive real rates, which would be sufficient to maintain the strength of the rupiah," he said.

He said the rupiah was unlikely to be affected if the Federal Reserve went ahead with an aggressive 50 basis-point rate hike at next week's policy meeting as Indonesian rates were still at a comfortable premium to U.S. rates.

Capital flows

Separately, participants of the Conference of Governors of Southeast Asian Central Banks (Seacen) said on Friday that an urgent problem facing some countries in the region is the resurgence of volatile portfolio capital flows.

"In an environment of excess liquidity, this would create pressures on both interest rates and exchange rates for many countries in the region," the central bank governors said.

The governors "recognized the need to continue to monitor closely developments in the capital markets," according to the Seacen communique.

The governors of Bank Indonesia, Bank of Korea, Bank Negara Malaysia, Bank of Mogolia, Monetary Authority of Singapore, Central Bank of Sri Lanka and Taiwan's Central Bank of China were among the participants at the conference, which took place over the past two days.

The region's economy is expected to grow 6.4 percent in 2000, while the inflation rate will remain moderate at 6.7 percent, amid a sustainable economic recovery following the recent financial crisis, according to the communique.

"Over the medium term, the region is expected to emerge from the crisis with stronger fundamentals," it said.

Economic expansion in Asia and the U.S. will propel global growth this year, the participants said.

South Korea's economic growth is forecast at 7.2 percent; Taiwan at above 6 percent; and the rest of the member countries fall in the range of 3.0-6.5 percent, the participants said.

The governors noted that the current period of "stability and growth is occurring in an environment of benign inflation."

"While inflation would not be an issue despite higher gross domestic product growth, governors noted the need to be cautious and to persevere with policies to achieve growth with price stability," the communique said.

"In this regard, member and observer countries concurred on the need for continuing macroeconomic stability and institutional reforms to sustain growth," it added.