PECC projects domestic bank recovery in 2000

JAKARTA (JP): The country's ailing banking system will resume normal operations in the year 2000, even though the debt resolution process and the bank restructuring program will proceed consistently, according to the Pacific Economic Cooperation Council (PECC).

In its Pacific Economic Outlook 1999-2000, PECC said problems in Indonesia's banking sector were still enormous, and that bank lending could not start until next year, even if the government's 20 percent to 30 percent interest rate target was reached earlier than expected.

The monetary authority started to reduce its central bank's deposit notes (SBI) in October 1998.

The weighted average yield on the notes fell on Wednesday to 20.34 percent, from 22.50 percent last week.

The report -- completed in March when the interest rate was at over 36 percent and the U.S. dollar at the Rp 8,000 level -- discusses the economic outlook of 19 countries in Asia Pacific, including Indonesia.

The report was released at the Center for Strategic and International Studies (CSIS) in Jakarta, and was attended by economic experts and CSIS executive director Hadi Soesastro.

The Indonesia economy is expected to continue declining in 1999 by minus 2.5 percent, compared to minus 13.1 percent the previous year, according to the report.

But it added that the economy would rebound in the year 2000 with 3.7 percent growth, and a steady long-term growth of less than 5 percent beginning in 2001.

The report bases the forecast on positive economic indicators.

In 1999, exports are expected to increase and imports to drop. But the government will increase expenditure to the level that will offset the export-import surplus, the report said.

The following year, private investment, bank lending and foreign capital inflow will resume amid continuing increased government spending.

"Most of the (government's) money will be spent on the social safety net," the report said.

The report explained that government spending will be more focused on the public, social-oriented sector, providing more room for private investments to manage profit-oriented sectors.

"Despite the budget deficit and lower interest rates, inflation is expected to decline from over 77 percent in 1998 to 22 percent in 1999."

The report said interest rates were forecast to continue to drop to about 15 percent in 2001.

The report estimated total capital outflow during the first half of 1998 at $28 billion, of which $8 billion was locally owned.

The two most affected sectors are construction, where output was down 39.7 percent, and financial services which decreased by 26.7 percent in 1998.

The report forecast 1999 to be a recovery year for the Asia Pacific region.

The growth's weighted average for the region would stand at 2.6 percent in the year, compared to 1 percent and 4.3 percent in 1998 and 1997 respectively.

PECC is a tripartite, nongovernmental organization devoted to promoting economic cooperation in the Pacific Rim. The organization brings together government officials, academics and business people to share perspectives and expertise. (udi)