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)