Govt expects lower interest rates

JAKARTA (JP): The interest rate for three-month Bank Indonesia promissory notes (SBI) should drop to below 23 percent in two weeks' time from the current 29.82 percent, according to Bank Indonesia deputy governor Miranda S. Goeltom.

"The interest rate on the 3-month SBI will soon decline," she said on Thursday on the sidelines of a seminar on banking.

Miranda explained that the expectation of low inflation and a stronger rupiah would allow a further decline in domestic interest rates.

The rate will be used as the variable interest rate of the government bonds, which are expected to be issued on Friday, to finance the recapitalization of eight private banks and 12 provincial development banks.

In addition to the market interest rate, the bonds will also carry a fixed interest rate.

Finance minister Bambang Subianto is scheduled to hold a news conference on the bond issue on Friday.

Miranda said the continuing decline in the domestic interest rate environment would bring the interest rate level of the three-month SBI to near the level of the fixed rate of the bonds by the end of this year.

Several government officials indicated earlier that the fixed rate would range from 10 percent to 15 percent.

Miranda said that a further decline in the interest rate would not hurt the rupiah due to several reasons.

She said the return on the local currency was still attractive because of the low inflation level, combined with the influx of foreign funds either through multilateral donors or private sector investment.

"There are many factors that will allow a further decline in the domestic interest rate without hurting the rupiah," she said.

"And the relationship between the interest rate and the rupiah is no longer as strong as in the past when the crisis heightened."

BI has allowed domestic interest rates to continue to decline over the past two months without causing the rupiah to weaken.

The interest rate of the benchmark one-month SBI promissory note is now 26.12 percent, compared to more than 36 percent two months ago.

The government announced on Wednesday that it would inject Rp 24.5 trillion (US$3.06 billion) out of the Rp 27 trillion funds needed to recapitalize eight banks.

The banks are publicly listed Bank Internasional Indonesia (BII), Bank Lippo, Bank Universal, Bank Bali, and nonlisted Bank Bukopin, Bank Prima Express, Bank Artha Media and Bank Patriot.

The government will also inject Rp 1.23 trillion to recapitalize 12 provincial development banks from a total cost of Rp 1.5 trillion.

The government will issue bonds to finance the recapitalization program, which is designed to lift the capital adequacy ratio (CAR) of the eight banks to the minimum 4 percent level, and to 8 percent for the 12 development banks.

Bank Indonesia deputy governor Subarjo Joyosumarto said that the government would finance 90 percent of the recapitalization cost of Bank BII, Bank Lippo and Bank Universal.

He added the government also would provide more than 80 percent financing for the recapitalization of Bank Bali.

Initially, the government planned to provide 80 percent financing with the remaining 20 percent was to be provided by the banks' owners.

But the bank owners could not come up with the 20 percent cash requirement in full because the recapitalization cost inflated from the initial estimate of about Rp 14 trillion due to a persisting negative interest rate spread problem. Only the smaller nonlisted banks managed met the cash requirement. (rei)