'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)