'Policy adjustment needed to contain speculative attacks'

JAKARTA (JP): Macro, micro and sectoral cooperation is badly needed to contain possible speculative attacks on the country's financial sector, Bank Indonesia Governor J. Soedradjad Djiwandono said yesterday.

Speaking at a conference, organized by the central bank and the International Monetary Fund, the governor said globalization had created a borderless financial world which undermined the roles of monetary authorities.

"Managing this kind of change will need an adjustment policy, involving not only macro, but also micro and sectoral sides," he told the conference.

Monetary policies, Soedradjad said, could not be separated from other micro-level policies, such as regulations on foreign exchange, credit, offshore borrowing and bank supervision, or from sectoral-level policies such as deregulatory measures directly affecting businesses.

He said a stable and well-managed macroeconomic policy mix would have a positive impact on micro and sectoral levels.

A conventional monetary policy will not be sufficient unless it is closely coordinated with micro instruments such as prudential rules and sectoral policies such as deregulatory measures to improve corporate efficiency, Soedradjad said.

Equilibrium

The governor said that Indonesia -- like other emerging markets -- attracted a lot of international funds seeking short- term gains.

Strong capital inflows indicate a widening of the spread between domestic and international interest rates. Similarly, capital outflows indicate that Indonesia is relatively unattractive for portfolio investment, he said.

"Maintaining equilibrium on both the external and the internal fronts has become an art for central bankers," Soedradjad said.

In a bid to restrain capital inflows, Indonesia's monetary authority has adopted a number of regulations, including those on bank's net open positions, commercial offshore borrowing and the supervision of financial institutions' borrowings.

Soedradjad said the policies had reduced the overall volume of inflows or altered their maturity profiles by varying degrees.

But he acknowledged there had been a tendency for such policies to become less effective in containing capital inflows in time. And that the rapid development of capital markets, for instance, had brought about major policy challenges because disturbances in one market could quickly spread to other markets.

He said the future challenge for monetary authorities in emerging markets was to reduce the vulnerability of domestic financial markets to the contagious effects of crises elsewhere.

"In Indonesia's case, the relative lack of depth of its financial markets makes this an even greater challenge," Soedradjad said. (rid)