Economic data better than expected: Morgan

Economic data better than expected: Morgan

JAKARTA (JP): JP Morgan issued a rosy report on the Indonesian economy Wednesday, saying that the country's economic indicators prove better than expected.

JP Morgan's commercial banking subsidiary Morgan Guaranty said in its report that the inflation rate continued the downward trend to 8.2 percent in April from 9.2 percent in March and 10.5 percent in February.

More importantly, the closely-watched trade balance came firmly into the black at US$847.5 million in February, the fifth consecutive month of strong showings in excess of $500 million.

"These trade gains support the government's recent revision of its current account deficit estimate in the 1995/1996 fiscal year to $7 billion from $7.9 billion," according to the bank's report.

The trade balance gain is largely coming from the stunning deceleration of import growth, from an expansion of 40 percent last September to contraction by 4.4 percent in February, it said.

Official foreign reserves climbed steadily from $14.2 billion last October to $16 billion at the end of April, the report said, adding that with the real Gross Domestic Products (GDP) growth at a robust 8.1 percent, the authorities are understandably cautious about overheating and therefore wish to keep liquidity tight and interest rates high.

"To attain these objectives, they will likely pursue a policy mix of sterilized foreign exchange intervention and regulatory measures," it said.

Liquidity

According to Morgan, present liquidity conditions are fast approaching those of 1993, when Bank Indonesia (central bank) aggressively sterilized the impact of capital inflow on the monetary base by issuing short-term promissory notes (SBIs).

Barring new major shocks that halt further capital inflow (as did the Medan unrest in mid-1994), the same policy response can be expected in next few months, it said.

"Today, however, there is the key difference that commercial banks' balance sheets are much sounder than in early 1993," it added.

Banks, which still needed to fortify capital bases hit by a series of non-performing loans during that time, limited their loans to just five percent.

By contrast, loans are rising at a 22 percent clip, far above Bank Indonesia's 1996 target of 17 percent growth.

Morgan said that it is, therefore, no surprise that Bank Indonesia hiked its reserve requirement on bank deposits from two to three percent earlier this year. This should curtail banks' ability to create new loans on the asset side of their balance sheets.

As in Thailand, a managed exchange rate regime and the absence of barriers to capital flows limited Indonesia's choice of monetary policy instruments.

Morgan said that if capital inflow picks up in the next few months, Bank Indonesia will likely attempt to hold down credit by relying on regulatory measures, such as moral persuasion and further reserve requirement hikes. (hen)