Local firms may turn to foreign banks

JAKARTA (JP): More local companies are likely to turn to overseas banks for loans in reaction to the central bank's plan to squeeze the lending market.

Banking analysts concur that local companies will have little alternative but to go offshore if they want to obtain cheaper loans.

This week alone, at least two local companies signed lending facilities with offshore financial institutions.

One of the two, Megacity Development Corporation, said it secured a loan of $121.5 million, while Sekar Group, the other firm, said it raised $30 million.

Banking analysts expect more companies to follow suit to avoid high interest rates at home.

"I think seeking financing facilities from offshore banks will be much cheaper than domestic loans, which are expected to become much more costly when the central bank's new reserve requirement becomes effective early next year," an analyst said.

Bank Indonesia announced last week that commercial banks must increase their reserves to 5 percent of their total deposits beginning in April, from 3 percent at present.

The analysts said that the increase in the reserve requirement, which will be the second since February, will tighten the lending market significantly.

They said that lending rates, which average 24 percent per annum at present, are expected to increase by one to two percentage points when the new reserve requirement come into effect.

The annual lending rates on foreign loans are set at between 1.5 and two percentage points above the Singapore Inter-bank Offered Rates (SIBOR) of around 6 percent per annum.

The analysts said that interest rates set by foreign banks will remain lower than those charged by local banks even after the offshore loans, mostly denominated in U.S. dollars, are adjusted to Indonesia's inflation rate and swap costs.

Bank Indonesia Governor J. Soedradjad Djiwandono said recently that the monetary authority will continue to restrict the flow of short-term borrowings so that the increase in offshore borrowings will not worsen the country's widening current account deficit.

The central bank limits the offshore borrowings of state-owned banks and companies. But the restriction is often not very effective because private companies tend to get offshore loans through domestic private banks, which are exempt from offshore borrowing caps. Private banks and companies are only required to report their offshore loans to the central bank.

Loans

Megacity Development Corporation signed lending facilities on Tuesday worth US$121.5 million from a syndication of local and foreign banks to finance its township project on the site of the former Kemayoran airport in Central Jakarta.

Megacity, a consortium consisting of Napan Group, Gajah Tunggal Group and Amcol Group, plans to develop 28 apartment towers and a nine-hole golf course on the 46.5 hectare plot.

Meanwhile, the Sekar Group, through its subsidiaries PT Sekar Laut and PT Pangan Lestari, signed in Surabaya yesterday a loan facility worth $30 million to strengthen its working capital and business expansion.

The loan facility was arranged by American Express Bank Ltd and the Singapore branches of Banque Nationale de Paris and Sumitomo Bank.

The Sekar Group said that the loan syndication was well accepted and was oversubscribed by more than 30 percent from the original facility amount of $27.7 million by banking groups from the United States, France, Japan, Singapore, Germany and the Netherlands.

Sekar Laut, listed on the Jakarta Stock Exchange, is involved in the production of shrimp crackers for the domestic and export markets.

Pangan Lestari is the distribution arm of Sekar Laut for the domestic market and operates through 4,000 distribution outlets. (hen)