Indonesia needs strong financial climate to attract capital: WB
Indonesia needs strong financial climate to attract capital: WB
JAKARTA (JP): Indonesia must press ahead with efforts to
create a stronger financial climate to attract foreign capital
and provide safeguards against capital volatility, which had
contributed to the 1997 financial crisis, according to the latest
annual report of the World Bank on external financing prospects.
"For all countries with strong investment climates, private
capital flows reinforce the payoffs to good policies and good
institutions through even faster growth. But the volatility of
those flows needs to be managed through stronger domestic
financial systems and, possibly, larger foreign exchange reserves
and contingent source of credit," said the executive summary of
the report, released here on Wednesday by the World Bank Jakarta
office.
The report added that although developing country shares in
capital flows had declined sharply since the financial crisis
began in 1997, there had been a greater concentration of capital
flow in a few top 10 developing countries including China,
Malaysia and Thailand, but excluding Indonesia.
The bank did not provide special capital flows data for
Indonesia.
The government has said that this year's economic growth,
projected at 5 percent, would be driven by exports and
investments.
But so far, the signs for creating a strong domestic financial
climate have not been encouraging.
For instance, there has been increasing pressure for Bank
Indonesia to delay the requirement for domestic banks to have a
minimum 8 percent capital adequacy ratio (CAR) by the end of this
year.
By international standards, banks should have a minimum CAR
level of 10 percent.
Bank Indonesia has warned that around 20 banks, including
those under the control of the government, might not be able to
meet the year-end CAR requirement. The central bank has said that
the banks must either merge or their owners inject fresh capital,
otherwise they would be closed down.
Merging the banks, however, is not easy.
Finance minister Prijadi Praptosuhardjo said recently that
problems in the domestic banking sector were complex.
Indonesia's banking sector has been badly hit by the financial
crisis.
The crisis was worsened by the massive outflow of foreign
capital, putting strong pressure on the local currency.
The report also said: "After precipitous declines in 1998 and
1999, capital flows to developing countries grew smartly in 2000,
but their recovery has still lagged behind growth of output and
trade since the late-1990s crises."
It said that external resources to developing countries
increased from around US$245 billion in 1999 to $295 billion in
2000.
Short-term external resources, which reached a peak of $43.2
billion in 1996, recorded net outflows in 1998 and 1999, and a
small net inflow of about $3.7 billion in 2000, the report said.
It added that long-term inflows fell from their peak of $342
billion in 1997 to $265 billion in 1999 but were up to $293
billion last year.
"The overriding message of this report is that the domestic
environment of the recipient economy is the key to the effective
absorption of international resource flows -- whether official or
private," it said. (rei)