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)