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)