Indonesia faces no problem in covering deficit

Indonesia faces no problem in covering deficit

JAKARTA (JP): Indonesia is likely to face no immediate problem
in covering its widening current account deficit, judging from
the sharp increase in the inflow of foreign direct investments,
according to Morgan Guaranty Trust Company.

The company's Singapore-based research unit stated in its
latest Economic Research Note, made available here last week,
that foreign direct investments, which are expected to further
surge in the coming years, will provide enough capital to cover
two-thirds of the current account deficit.

The note estimated that the average rise of foreign direct
investments reaches approximately US$500 million per quarter.

Indonesia's foreign exchange reserves, which rose more than $1
billion during the first three quarters of the year, indicated
that the country received capital in excess of the current
account deficit, it said.

However, it cautions that some of the capital inflow has been
short-term in nature, thereby increasing Indonesia's
vulnerability to changes in investors' attitudes.

About 20 percent of the country's total external debts of $100
billion is short-term.

The current account deficit probably surged to $2.7 billion in
the second quarter, in light of the June trade deficit, and the
note estimates that the current account deficit would reach
approximately $8 billion in 1995, accounting for 3.9 percent of
the country's Gross Domestic Product.

Indonesia's current account deficit was checked at $3.1
billion in 1994.

The Hong Kong unit of Salomon Brothers recently estimated the
1995 current account deficit at $5 billion, while Econit, an
Indonesian economic advisory group projected it at $6.4 billion.

Salomon and Econit have warned that the widening current
account deficit could impose strong pressure on the Indonesian
economy if no appropriate measures are taken to limit imports.

Besides the current account deficit, inflation is also of
concern to investors.

Morgan stated in the note that the monthly inflation figures
are volatile but, looking through the ups and downs, this year's
inflation seems stuck at about 10 percent, within the same level
of last year.

Salomon estimated the inflation rate will be checked at 7.5
percent next year, while Econit put its estimate at 10 percent.

Morgan said a tighter policy is needed to offset the
stimulative impact of the huge buildup of foreign investment
approvals.

The main goal now must be to maintain market confidence,
recognizing the heightened sensitivities of investors after a
financial crisis in Mexico.

Objectively, Indonesia has little in common with Mexico,
especially as its currency is not overvalued. But like Mexico,
Indonesia has a large external debt and its reserves are lower
than its short-term debt.

Morgan acknowledged that a tightening policy will be costly
because higher interest rates will trigger new inflows of short-
term capital. In addition, the higher interest rates will hurt
banks with bad loan portfolios.

"However, the cost of trying to muddle through will be much
higher if investors lose patience," it says.

Most probably, according to Morgan, Bank Indonesia will raise
reserve requirements, as well as interest rates and push for more
reforms in the banking sector to curb bank credits. (hen)