'Liquidity, lower rates' can save businesses

'Liquidity, lower rates' can save businesses

JAKARTA (JP): Dying local businesses could be saved only with
supplying enough liquidity and lowering bank interest rates,
economist Sjahrir and banker Masyhud Ali said yesterday.

Sjahrir noted that more and more companies were in trouble now
because of a credit crunch and a high interest rate policy
pursued by the government to stabilize the currency.

"Now more and more companies are dying, only liquidity and
lower interest rates could save them," Sjahrir said at a seminar
hosted by Panji Masyarakat magazine.

It was high time for the government to focus more on managing
liquidity and lowering interest rates to revive local businesses
rather than defending the rupiah at the expense of the former, he
said.

The multi-billion dollar bailout package sponsored by the
International Monetary Fund (IMF) would be enough to stabilize
the rupiah, at least for the near term.

"Anyway, the rupiah will be guarded. So, the most striking
issue now is how to prevent our domestic economy from entering a
prolonged recession," Sjahrir said.

To comply with the IMF-sponsored bailout package, the
government has targeted to reach a budget surplus of one percent
of the gross domestic product.

Consequently, the government's spending will be curtailed
significantly to reach the surplus as revenues from domestic
sources, especially taxes, may drop significantly due to the
economic downturn.

"It means the only fund which could fuel the economy should
come from bank lending. But there is no indication yet that such
bank lending will come soon," Sjahrir said.

He said most banks now could not disburse lending to local
corporations due to high interest rates. "Only a senseless
company would take a loan with a 30 percent or even 40 percent
interest rate."

Lowering rates would not be possible only by reducing
benchmark Bank Indonesia Certificates (SBIs) with liquidity being
kept relatively tight.

"All right, Bank Indonesia said it has eased liquidity. At
what level? I dare say it is far from enough to revive the
economy," Sjahrir said.

Masyhud Ali, president of Bank Putera, shared Sjahrir's
argument that supplying more liquidity and lowering interest
rates were the only answers to keep the national economy afloat.

Masyhud acknowledged that Bank Indonesia had several times cut
its benchmark SBI rates to drive down overall interest rates in
the banking industry.

He also acknowledged that the central bank had eased liquidity
to some extent by buying money market securities (SBPUs) and
disbursing maturing SBIs.

"But why have interest rates been so difficult to bring down
although Bank Indonesia has initiated rates cuts several times
and opened a SBPU facility?" he asked.

It was a wrong strategic action taken by the monetary
authority to tackle the currency crisis spillover from Thailand
which kept the interest rates high, he said.

At the beginning, when the crisis started in Indonesia in late
July, the government was still overconfident that it could defend
the rupiah and promised to sell whatever amount of dollars needed
in the market.

"At that time, we believed that the government would intervene
whenever the dollar-rupiah rate crossed the allowed band,"
Masyhud said.

When the rupiah continued to depreciate, the government did
not fulfill its promise to defend the currency. Instead, it
floated the rupiah in mid-August.

As a result of the floating, the rupiah fell from below the
2,600 level to over the 3,000 level against the U.S. dollar. The
government then suddenly tightened liquidity and raised interest
rates three times.

"That was a grave mistake. The government seemed to be unable
to differentiate between real corporate demand for dollars and
speculative demand. And we have to pay a lot for such a mistake,"
Masyhud said.

The government action created a negative sentiment for the
rupiah. Even though it was supported by tight liquidity and high
interest rates, the rupiah continued to weaken.

"Confidence in the rupiah is a manifestation of confidence on
the management of the overall economy. So, if such confidence on
the currency is lost, so is the confidence in the economic
management," Masyhud said. (rid)