Local banks advised to raise deposit rates

JAKARTA (JP): Analysts are warning that banks must raise annual interest rates on time deposits by at least one to two percentage points to curb capital flight resulting from the recent rises in interest rates in the United States.

Riyanto Sastroatmodjo warned here yesterday that the adjustment of domestic interest rates is essential to curb capital outflow.

"Interest rates on rupiah time deposits should be raised to between 15 percent and 16 percent per annum," he said, citing the ideal level for interest rates.

On Tuesday, the U.S. Federal Reserve raised the discount rate and the federal fund rate by 0.75 percentage point to 4.75 percent and 5.5 percent per annum respectively. The increases were the largest since May 1991, when the Fed pushed the discount rate by a full point to 14 percent. It is expected to further push up interest rates to at least six percent per annum on time deposits in the American dollar offered by overseas banks.

The interest rates of three-month rupiah deposits offered by local banks currently range between 13 percent and 15 percent per annum. Major banks and state banks usually offer a lower rate of 13 percent, while medium-scale and small banks offer between 14 percent and 15 percent.

Analysts at foreign banks also fear the rise in the U.S. interest rates will result in a great amount of capital flight from the domestic money market.

Inflation

They said that Indonesia's high inflation rate is another reason why raising the interest rates of the local banks is urgent.

Riyanto, a commissioner of a number of private banks, said the interest rate adjustment should begin with the increase in the discount rates of Bank Indonesia's Certificates, the central bank's instrument in managing the money supply.

Drying up

He said that the high interest rates overseas could draw off foreign currencies from Indonesia, thereby drying up foreign exchange reserves in local banks.

In April this year, the erosion of foreign reserves held by commercial banks reached as high as $3.5 billion as a consequence of the increase in interest rates overseas, he said.

"Besides adjusting its discount rates, Bank Indonesia (the central bank) should also more closely monitor foreign commercial loans," said Riyanto, a former senior official of the central bank.

He said that the higher lending rates on overseas money markets would put a heavier burden on the country's debt servicing capability.

Indonesia's private borrowing totaled around $37 billion, accounting for around 40 percent of Indonesia's total external debts, which amounted to $93 billion as of October. (hen)