Interest rates may decrease one point

Interest rates may decrease one point

JAKARTA (JP): Interest rates will decrease by at least one
percentage point if there are no more policy errors in the second
half of this year, Rizal Ramlia, a senior researcher of the
Econit economic advisory group, predicted yesterday.

"If there are no more policy errors or inconsistencies like
the policy of the "national car", and if there are no political
surprises, there will be pressure to reduce interest rates by at
least one percentage point during the second half," Rizal said.

Speaking before Leadership Forum XVII, organized by the Center
for Corporate Leadership in cooperation with The Jakarta Post,
Rizal said there was an indication that inflation was declining
and that banks had too much liquidity.

During the first half of the year, inflation was negative in
two months -- down 0.61 percent in March and down 0.07 percent in
June.

"This indicates that the economy has started to cool off. This
is a good sign and I hope it will continue in the next half,"
Rizal said.

He warned, however, that if there were surprises "we may face
a difficult situation".

He said he did not agree with the Japanese delegation to the
recent meeting of the Consultative Group on Indonesia (CGI), who
suggested that Indonesia should take more drastic monetary policy
measures.

"I didn't agree with them. The fact is that the monetary
contraction being pursued by the government has started to work,"
he said.

He said that this contraction was being made gradually. It was
not as extreme as the one which resulted from a policy introduced
by the minister of finance J.B. Sumarlin in 1991.

Sumarlin had decided to withdraw over Rp 8 trillion (US$3.4
billion at current rate) from the banking system to tighten the
money supply.

"If the contraction was drastic, I think there would be more
victims and many companies would face cash flow problems. In
fact, the current big loan problems were partly caused by drastic
monetary policy in 1991," Rizal said.

He said there had been no good signs regarding the country's
export growth. Some important sectors of the Indonesian economy,
such as the electronics and pulp industries, have started to show
weaknesses.

Growth sectors

"Indonesia needs to find new growth sectors for the economy to
increase its exports. But unfortunately, our minister (of
industry and trade) is still busy handling the 'national car'
case. He does not have any time to think of anything else, yet,"
he said.

Under the national car policy, the government awards tax and
tariff breaks to PT Timor Putra Nasional, a company controlled by
President Soeharto's youngest son Hutomo Mandala Putra. The
company is committed to producing cars with up to 20 percent
local contents by the end of its first year of operations, up to
40 percent by the end of its second year and 60 percent by the
end of its third year. The United States, Japan and the European
Union have all protested the policy.

"What worries me is not the 'national car' project itself. But
the fact that it will occupy the minds of all of our policy
makers, who might ignore the problems that we must address in
other sectors," Rizal said.

He said it was encouraging to see that capital intensive
industries, like petrochemical, steel and paper manufacturing,
were starting to improve.

Rizal was also concerned that most of the foreign investments
approved in the first half of this year were committed by
businesses orientated towards the domestic market.

"This worried me because it will worsen our current account
deficit," he said.

Indonesia's current account deficit is estimated to increase
from $6.9 billion in 1995/1996 to $8.7 billion in 1996/1997. (13)