Liquidity eased
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.