Liquidity eased
Bank Indonesia, the central bank, has moved again to gradually ease the credit crunch which has gripped businesses since July even though the rupiah exchange rate remains highly volatile, above Rp 3,600 against the U.S. dollar. Bank Indonesia, apparently, has realized that the credit pinch has outlived its usefulness as a deterrent against speculative attacks on the rupiah. The tight monetary policy has, instead, begun to claim victims in the private sector. And if this condition continues much longer, the currency turmoil may worsen into a real financial crisis, a chain of bankruptcies and painful recession.
On Monday, Bank Indonesia took four measures designed to inject more liquidity into the economy and reduce the costs of funds. It reopened short-term money market securities, which were closed in July, and cut the minimum reserve requirement for dollars from 5 percent to 3 percent. The central bank introduced a preshipment rediscount facility to exporters and further lowered its benchmark interest rates (Bank Indonesia Certificate rate) by one percentage point. Even though the interest rates remain high, ranging from 14 percent to 20 percent for papers of up to three-month maturity, they are already much lower than those in August, when the rates reached as high as 30 percent.
It is obviously economically unfeasible for the monetary authorities to bring the interest rates back down to the levels before the beginning of the currency crisis in early August. The relaxation of the money pinch should be made gradually, especially because the rupiah has yet to settle at its market equilibrium rate.
The reopening of the money market securities is quite helpful because it will inject new liquidity directly into the market. The preshipment financing facility also will greatly help exporting companies to manage cash flows because the loans can be used for financing production operations. The reduction of the foreign exchange reserve requirement will increase dollar supply to the money market. Bank Indonesia estimated this measure would release about US$850 million to the domestic banks' funding base to support dollar loans to businesses. The lowering of interest rates will further contribute to cutting down the costs of funds.
The latest measures seemed to be the most the central bank could do now to improve the economic liquidity amid the rupiah volatility and the speculations about the likely outcome of the government-IMF negotiations for an aid package to stabilize the rupiah. The central bank hoped that additional dollar supply would help reduce the pressures on the rupiah caused by the demand from businesses which need dollars to service foreign debts.
However, given the latest threats of another fallout of the crisis of confidence in Thailand's economic reform measures, the monetary authorities now cannot do much to stem the rupiah volatility. Whatever measures the central bank may take to help stabilize the rupiah will likely fail because the market is now waiting to see what kind of aid package will come out of the government-IMF negotiations, and what will be the conditions attached to the assistance.