BI warns of economic overheating

BI warns of economic overheating

JAKARTA (JP): Bank Indonesia Governor J. Soedradjad Djiwandono
warned yesterday that the country's economy is running an
increasing risk of overheating.

"We have felt indications of an overheating economy since last
year," Soedradjad said in his keynote speech to a seminar on
Indonesia's banking and financial sectors.

Soedradjad added that last year's inflation rate approached
the double digit level, at 9.24 percent, and the current account
deficit reached US$3.1 billion.

Although the inflation rate for the first nine months of this
year was only 6.79 percent, as compared with 7.38 percent for the
same period of last year, the current account deficit is expected
to expand further as a result of an increase in imports, the
growth of which has been much higher than the growth of exports.

During the January-August period of this year, exports grew by
18.4 percent, as compared with 15 percent during the same period
of last year, while imports grew much more strongly, at the rate
of 28.9 percent.

Soedradjad said that this year's high growth of imports was
fueled by increasing domestic consumption as well as by expanding
investment activities.

"We are optimistic that we can curb this year's inflation
rate. However, our current account deficit is increasing this
year," Soedradjad said.

He added that the deficit is still manageable, as it will be
offset by an influx of foreign capital through direct investment,
portfolio capital and official and private loans.

Soedradjad cautioned that the influx of foreign capital would
cause additional pressures on the country's money supply, which
is already expanding as result of rising bank credits.

Bank credits had already reached Rp 216 trillion ($95 billion)
as of August.

Soedradjad gave assurances that the central bank would
continually improve the effectiveness of its market instruments
in managing the money supply, both in narrow terms (M1) and in
broad terms (M2).

"As the effects of our instruments are indirect, we have to
use market-friendly instruments, which are accepted by the
market," Soedradjad later told journalists.

Those instruments include Bank Indonesia certificates (SBIs),
short-term securities (SBPUs), exchange rate band and moral
suasion.

Soedradjad predicted that annual growth of the money supply
would remain high this year. The annual growth of broad-term
money supply as of August reached 27.1 percent.

The central bank was successful in confining money supply
expansion in broad terms to 21.5 percent in the 1994/1995 fiscal
year, which ended in March, as compared with 22.2 percent in the
previous fiscal year.

As the globalization of the financial market continues,
Soedradjad warned that financial crises, such as that which
struck Mexico earlier this year, could hit any emerging market
that did not prudently manage their macro-economic aggregates.

"Under these financial market conditions, an incident like the
Mexico crisis could happen any time in the future. This reality
underlines the importance of a prudent monetary management," the
governor said.

He said the monetary authority would maintain prudent macro-
economic policies, adding that monetary factors, including M1 and
M2, would be adjusted in accordance with the needs of the non-
financial sectors. (pwn/rid)