High interest rates
High interest rates
Indonesian businessmen who complain about the persistently
high costs of bank loans should not expect any significant drops
in the domestic credit interest rates in the near future. All
monetary indicators and the ongoing internal consolidation at
most banks rule out any meaningful interest-rate decreases.
Bank Indonesia's (central bank) Governor Soedradjad Djiwandono
when talking to reporters after the inauguration of new members
of the Indonesian Bankers' Institute last Thursday also hinted
that it was highly probable that interest rates would remain at
their current rates (20 percent or 21 percent).
Indeed, the latest monetary indicators are such that there
will not be much leeway for an easing of the monetary policy in
the near term without sending the wrong signal to the financial
markets. The money supply has expanded by 26.5 percent in the
first nine months of this year, compared to 21.5 percent in the
corresponding period of last year. The inflation rate, although
likely to remain slightly below last year's 9.24 percent, will
still be on the high side of the single-digit range.
The widening deficit in the current account of the balance of
payments, due largely to the steep growth of imports, is another
constraint that needs to be taken into serious account. It is
true, as Soedradjad noted at the opening of the Asia-Pacific
forex meeting on Friday, that although the current account
deficit is expected to increase to around three percent of gross
domestic product from only 2.3 percent ($3.7 billion) last year,
this will still be manageable. In any case, the overall balance
of payments is likely to show a surplus this year due largely to
big capital inflows.
Nonetheless, lower interest rates are not economically viable
right now. Cheaper credit would further stimulate imports,
thereby causing stronger pressures on the external balance and
bringing back the specter of double-digit inflation. As matters
stand, imports will continue to surge due to the dramatic
increase in the licensing of new foreign and domestic investments
this year, even without a cut in interest rates.
We feel the need for bigger capital inflows also requires the
maintenance of high differences between domestic and foreign
interest rates even though the capital this interest differential
attracts is mostly short-term.
The internal condition of most major banks also speaks against
lower interest rates. First of all, most major banks are still
grappling with problem loans and are undergoing intensive
consolidation to meet the prudential regulations which were made
much tougher by the central bank last September.
The September ruling raises the minimum paid up capital of
foreign exchange banks to Rp 150 billion ($65 million) and the
capital adequacy ratio (against risk weighted assets) to 12
percent, higher than the eight percent minimum set by the Bank
for International Settlements. Even though the new capitalization
requirement is effective immediately only for new forex banks,
the existing ones will also have to conform with the new
regulations within six years.
The new rulings, we reckon, will force bank owners to be
especially careful about their bank management as they will have
bigger stakes in their bank operations. For the time being, until
the banks can raise their paid up capital either through mergers
or share flotations, they will have to curb the pace of their
credit expansion and simultaneously tap private savings to a
greater extent. This in turn will become another block on
interest rates coming down.