Businesses brace for costlier credit

The Jakarta Post, Jakarta

Already struggling with higher fuel costs, businesses in the country may soon have to cope with pricier debts as well, while consumers may want to reconsider unnecessary credit spending, with economists predicting a continued rise in interest rates.

In its latest outlook on the Indonesian economy, Standard Chartered Bank estimates the central bank will continue raising its key interest rate into next year to prevent inflationary pressure from disrupting Indonesia's macroeconomic stability.

"We expect Bank Indonesia to further raise its rate to 11.5 percent by the end of this year, and to 12 percent by the first quarter of next year," an economist at the bank, Fauzi Ichsan, said.

Voicing a similar opinion, Bank International Indonesia (BII) chief economist Ferry Latuhihin said the rate could reach 12 percent, on the back of inflation that could end up at 11.01 percent.

"Economic growth (this year), meanwhile, will only reach 5.65 percent," he said -- lower than the government's target of 6 percent.

The central bank's benchmark rate currently stands at 11 percent, looking over on-year inflation of 9.06 percent in September. The government is targeting full-year inflation of 8 percent.

"The rate hikes were even faster than those of the U.S. Federal Reserve, raising the one-month interest rate differential between the rupiah and the U.S. dollar to 7.1 percent, the highest since January 2004," Ferry said.

The central bank has raised its benchmark rate four times since it was introduced as a new inflation-targeting instrument in July at an initial level of 8.5 percent. It last hiked the rate to 11 percent to anticipate a surge in inflation following the fuel price increases on Oct. 1, and the usual year-end inflationary pressure.

However, Bank Indonesia Governor Burhanuddin said on Sunday at the G-20 meeting in Beijing that its latest monetary and fiscal measures were at present sufficient to minimize the impact of the global surge in oil prices.

Bank Indonesia rate hikes help ease inflation and keep the rupiah attractive, but they could also hurt economic growth by slowing business and consumption as credits become more costly.

Some businesses have said they would only be able to afford rates of up to 17 percent before resorting to drastic cost-saving measures -- including layoffs, while lenders have considered raising the current 15 percent rate for commercial loans.

Bank Mandiri, the country's largest lender by assets, has said it would be able to tolerate the Bank Indonesia rate reaching 12 percent, while Bank Central Asia (BCA), the second largest lender by assets, said it might consider lifting its rates if the central bank rate rose to more than 10.5 percent.