Overheating threat still looms

Overheating threat still looms

JAKARTA (JP): Bank Indonesia Governor J. Soedradjad Djiwandono
said yesterday the national economy had started to cool but
warned that a relaxed monetary stance could cause it to overheat
again.

The governor of the central bank told an annual bankers dinner
last night that monetary policy this year would continue to focus
on strengthening internal and external macroeconomic stability.

"Therefore, an indicative target of 17 percent has been set
for the expansion of claims on the business sector (lending) and
this is expected to bring the growth of the economic liquidity
(M2) down to 18 percent," Soedradjad said.

Soedradjad, who hosted the dinner, briefed local and foreign
bankers on last year's monetary developments and charted out the
direction of monetary management and likely challenges in banking
this year.

He said monetary policy aimed to maintain domestic interest
rates at a level capable of maintaining internal and external
equilibrium and reducing the gap between offshore and domestic
interest rates to a reasonable level.

"The real interest rates are expected to ensure that growth of
domestic demand is consistent with the effort to bring down
inflation and the current account deficit," he added.

Soedradjad said that non-oil import growth had been cut from
26 percent in 1995 to 10 percent last year, and the annual growth
of broadly-defined money supply (M2) from 31 percent to 26
percent.

The annual growth of bank financing (lending, securities,
equity participation etc.) for business had dropped from 22
percent in 1995 to 19 percent last year and the inflation rate
had dropped from 8.6 percent to 6.5 percent, he said.

"But bank lending and the M2 continued to exceed the desired
targets," he warned. These trends indicated that economic
overheating had not completely subsided.

Soedradjad called for more vigilance on the foreign exchange
market's susceptibility to domestic and international turbulence
caused by non-economic factors.

He also warned about the rapid growth of private offshore
borrowing, which constituted almost 50 percent of the country's
outstanding foreign debt of US$110 billion.

An inefficient use of foreign borrowings would only create
future problems given the large foreign debt and high debt
service ratio, the governor said.

Indonesia's debt service ratio -- the ratio of debt servicing
obligations to export revenue -- is 31.7 percent, of which 15.5
percent is contributed by the private sector.

Soedradjad suggested that private inflows be channeled to
finance export-oriented activities that would support their
repayments.

"In this regard, the assessment of private sector projects
financed by offshore borrowing should be carried out more
rationally and objectively based on each borrower's condition,"
he said.

On the latest banking developments, he said the number of
commercial banks had stayed constant at 239 last year but 439
more bank offices had opened.

The number of banks which failed to comply with the capital
adequacy ratio fell from 21 to 16 banks, he said.

"But during 1996, more banks violated the legal lending limit
and the small-scale credit requirement. There has also been a
similar trend observed in violations by foreign and joint venture
banks of the export credit requirement."

To strengthen local banking, he said, the central bank would
continue to encourage consolidation and mergers among banks.

Such measures might be voluntary, such as those aimed at
increasing the competitiveness of local banks, or they might be
compulsory in regard to saving problem banks.

The government recently issued a regulation on bank
liquidation, which according to Soedradjad, aimed to provide
legal certainty and increased protection for depositors if a bank
was liquidated.

To increase the effectiveness of bank supervision, Bank
Indonesia launched a pilot scheme last year to allow chartered
public accounts to examine banks.

Soedradjad said an initiative was also underway to improve the
terms of reference for bank examinations through a pilot project
to examine eight banks which suffered complicated problems.

He said the central bank was coordinating efforts with the
Attorney General, the chief of the National Police Force and
other parties to deal with bank fraud and money laundering.

The government is looking into ways to let the central bank
investigate bank fraud. The central bank is expected to be able
to investigate the more technical aspects of fraud, while the
criminal aspects would be handled by the police or the Attorney
General's Office.

The governor said that banking policy this year would continue
to focus on the development of a sound, competitive banking
industry.

"This is essential because banks assume a special function in
the process of creating money supply and maintaining the
stability of the national financial system, and therefore play a
pivotal role in the implementation of monetary policy," he said.

The government is drafting a regulation on banking secrecy to
help the central bank and related institutions solve the bad debt
problems which have long haunted the banking industry.

To improve risk management, Soedradjad said, the central bank
would continue to encourage banks to adhere to self-regulatory
banking principles while improving their management, human
resources and technological infrastructure. (vin/rid)