BI to keep tight monetary policy until worries over

BOGOR, West Java (JP): Bank Indonesia will stick to its tight monetary policy until worries over the rupiah exchange rate and inflation truly subside, director Achjar Iljas said here on Saturday.

Achjar said pressure on the rupiah would remain high until local corporations with huge overseas debts managed to reschedule their obligations, while primary pressure on inflation might come from the expectation of higher inflation.

"The momentum is good, but we don't want to be too premature in lowering interest rates. But if the current stable condition continues, it will be enough for us to gradually lower the rates. Our tight monetary policy is only temporary," he told a journalists workshop.

The rupiah strengthened significantly against the U.S. dollar last week, ending at Rp 9,050 on Friday, compared to more than Rp 10,000 last month and Rp 15,000 in June.

Achjar attributed the rupiah appreciation to improving sentiment in regional currencies following the strengthening of the yen against the dollar.

"But is this sustainable? We're still observing. This is a good opportunity, but we have to be careful because if we relax the tight monetary condition it could create potential demand for dollars."

He pointed that the more than US$20 billion in the country's private sector overseas debt due this year presented a huge potential demand for dollars, with accompanying pressure on the rupiah.

He explained that the demand could be eliminated if the debtor companies reached rescheduling agreements with their creditors and entered the Indonesian Debt Restructuring Agency (INDRA).

Under the June Frankfurt agreement, representatives of the foreign creditors generally agreed to reschedule the debt over eight years, including a three-year grace period for the principal installment.

"The INDRA scheme needs more time to work because the debtors and creditors are still negotiating," Achjar said.

He said that if the interest rates were cut immediately amid the existing huge potential demand for the dollars, the debtors would rush to borrow the rupiah to purchase the dollar.

"But if they join INDRA, the potential demand on the dollar will be gone and its opens the door for us to lower interest rates."

As of last month, no companies has signed on with INDRA.

Achjar added that another important factor to watch was the inflation rate which had started to decrease but "is it sustainable?"

"The question is about people's expectation of inflation. This will be largely influenced by past inflation rates." People tend to expect higher inflation, he added, because of their experiences in the past.

The Central Bureau of Statistics announced last week that the inflation rate for September was 3.75 percent compared to 6.30 percent in August.

"How can this trend be maintained? It all depends on food supply, distribution and political stability."

He explained that pressure on inflation could be reduced if the distribution system for food, particularly rice, was not disrupted to maintain supply.

He added that if the rupiah stabilized, it would also reduce inflation from imports of goods.

"So relaxing the tight monetary policy by lowering interest rates will only be done if we're certain that pressure on rupiah and inflation has subsided."

Recapitalization

Meanwhile, BI director Soebardjo Djojosoemarto said here Saturday that about 12 banks had been summoned to be informed about their capital adequacy ratio (CAR) condition based on the financial due diligence results, in which some had CAR levels below minus 25 percent.

Soebardjo added that another 15 banks would be summoned this week.

"Out of the 27 banks, 15 are foreign exchange banks and 12 are nonforeign exchange banks," he said.

Under the government's bank recapitalization program, banks with CAR below minus 25 percent would have gain fresh capital to reach a CAR level of between minus 25 percent and below 4 percent in order to be eligible to join the government-sponsored recapitalization program.

Soebardjo said those which failed to improve their CAR level would receive advice on a case-by-case basis, including encouragement to merge.

He did not mention whether liquidating the institutions would also be considered.

"Until now there's none which seems to give up in trying to improve their CAR level, in fact there are those who told us that they want to jump to the category A," he said.

Category A refers to banks with CAR of more than 4 percent.

All of the country's more than 200 commercial banks must have a minimum CAR level of 4 percent by the end of this year. (rei)