Inflation has Indonesians converting to dollars

Inflation has Indonesians converting to dollars

JAKARTA (JP): High inflation in the first three months of this
year has encouraged people to deposit their money in U.S. dollars
rather than rupiah to avoid losses from the Indonesian currency
depreciation, according to bank executives.

The inflation rate has increased from 1.25 percent in January
to 1.76 percent in February before falling back to 0.7 percent in
March. This puts inflation in the first quarter of this year at
3.71 percent, making the government's estimate of a year end rate
of five percent unrealistic.

"Deposits in the dollar have continued to grow in the last two
months," an executive of Bank Bali said.

Executives of other major commercial banks have a similar view
of the trend depositors.

However, increases in the value of the time deposits in
American currency in foreign banks was not as significant
compared to those in local banks.

"Our interest rate (on dollar deposits) is lower than domestic
banks and I think this is the reason why people prefer to deposit
their dollars in local banks," an executive of Standard Chartered
Bank.

Depreciation

Kiki Handijaya, a director of Modern Bank, said the
government's proposal to depreciate the rupiah against the dollar
at around six percent has fueled the demand for dollar.

"There is a rush to buy dollars as the people convert their
time deposits to U.S. currency," he said.

He said if the depreciation of the rupiah against the dollar
rises to six percent this year from 2.33 percent in 1993 and the
inflation reaches above nine percent, the people will get no
profit from interest bearing rupiah accounts.

The interest rates of the time deposits in rupiah offered by
major banks are between eight and nine percent per annum or
almost the same level of the 1993 inflation rate, which reached
9.77 percent.

Bank analysts said that the people will get nothing but losses
from their rupiah deposits if the inflation rate reaches as high
as that in 1993.

"If the interest rate is nine percent and the inflation is
also nine percent, you will suffer a loss because you have to pay
a 15-percent tax on interest earnings," an analyst said.

He said that the low interest rates have also encouraged
people to invest their money in dollars, which are expected to
record a faster appreciation against the rupiah this year.

By depositing money in U.S dollars, depositors could also
profit from the currency's appreciation against the rupiah, which
may reach between four and five percent per annum, in addition to
the rate of interest.

"Above all, depositing money in U.S. dollars will make people
feel more confident and free from fears about rupiah
devaluation," he said.(hen)