Poor macro-economic performances blamed for rises in interest

Poor macro-economic performances blamed for rises in interest
rates

By Hidayat Jati

JAKARTA (JP): The pall rising interest rates has continued to
cast over business in Indonesia has prompted some analysts to say
that this only highlights the weaknesses of the economy.

"Our interest rates have become vulnerable to the U.S. dollar
interest rate because of our own poor performance," business
analyst and bank commissioner Priasmoro Prawiroardjo told The
Jakarta Post.

"We are, therefore, in a state of uncertainty and doubt," he
added.

The Indonesian economy certainly has not received much good
news recently. The increase in bank deposit rates, which will
most likely trigger a hike in lending rates, came on the heels of
disappointing reports on exports, inflation and the state of the
banking industry.

The rate hike was spurred earlier this month by the U.S.
Federal Reserves .75 percent rise in short-term interest rates.
Three state-owned commercial banks, Bank Bumi Daya, Bank Tabungan
Negara and Bank Negara Indonesia (BNI) quickly followed suit and
raised interest rates on their one-month deposits from eight to
nine percent per annum and on their three-month deposits from
nine to 10 percent.

They were joined to varying degrees by a number of private
banks, including the giant Lippobank, Bank Bali, the small Bank
Pinaesaan and the foreign-owned Bangkok Bank.

Impact

Analysts maintain that the Fed's move would have had a more
limited impact than has been witnessed if the fundamentals of the
economy were sounder.

Rizal Ramli, an outspoken economist from the Econit consulting
firm believes that poor macroeconomic performance is at the root
of the problem.

"We must admit that we have slacked off a bit recently," he
said to the Post.

Rizal pointed out that the economy has been beset by 3.95
percent inflation during the first four months of this year which
means that the governments target of annual five percent
inflation is out of reach.

On the banking side, the country is currently facing a serious
test from the ongoing trials of a politically connected
businessman and some bankers, who are accused of defrauding
state-owned Bank Pembangunan Indonesia (Bapindo) out of US$449
million.

Standard & Poor's, a U.S. credit rating company, recently
found the Indonesian banking system to be a "high risk
environment" and "undergoing a period of financial stress."

On top of all of this, the country's exports of non-oil
products have declined in the last few months.

"All of these problems and uncertainties have filled our
banking sector with doubts," said Priasmoro.

Rizal also warned that while lending rates for now remain at
16 to 17 percent per year, the "inefficient practices" of
Indonesia's banks will most likely cause them to rise soon.

"Our banks maintain a high spread (the difference between
deposit and lending rates) of about nine to 11 percent," he said.

Most banks in developed countries maintain a spread of four to
five percent, he added.

Recent figures from Bank Indonesia (BI), the central bank,
seem to confirm the mood that Priasmoro described. State banks,
which controls more than 50 percent of the entire lending
portfolio in the banking sector, raised their outstanding loans
by a mere 5.1 percent to Rp 71.76 trillion last December from the
end of 1992. This growth was far lower than the 14 percent
recorded the previous year.

Wary

The wary business mood described by Priasmoro is clearly
evident at the Jakarta Stock Exchange (JSX), where share prices
have been hit hard by the rise in U.S. interest rates.

"The recent increase in the domestic deposit rate, in addition
to the hike in U.S. interest rates, is leading our stock market
into a gray area," Aat Ardiansyah, an analyst at DBS Securities,
told the Post here.

The JSX Composite Index, which rose 110 percent last year, has
steadily eroded to 467.39 last weekend from 592.94 in early
January.

"Worse still, we detect some signs from the U.S. that they
will again raise interest rates, probably by 0.75 percent," Aat
said, while acknowledging that the JSX is dominated by foreign
investors.

BI's recent report, moreover, added to the gloomy atmosphere
by revealing that the money supply fell to Rp 149.3 trillion
(about US$710 million) at the end of March from Rp 151.3 trillion
as of February.

BI was also apparently trying to "correct" the situation early
this month by offering a 1.5-point increase in interest rates to
companies and banks selling money market securities.

This move will encourage local banks to raise their deposit
rates even further.

Lending rates will certainly follow suit, which in turn will
send bad vibes to certain industries, especially those with
demand sensitive to changes in interest rates.

Property

Ciputra, a leading property baron, said last week that housing
demand will likely grow by 9.4 percent this year. But some
analysts predict a rush of house buying before lending rates
increase.

Ciputra himself softened his projection by adding this
condition: "as long as the lending rates stay below 20 percent a
year."

Priasmoro said the best way to lessen the country's dependence
on U.S. interest rates is to launch more comprehensive
deregulation to make the economy more efficient.

"This is the way to restore confidence," he added.
"Unfortunately the government has the habit of relying too much
on the monetary sector."

Rizal Ramli also stated that to fight inflation, the
production sector of the economy must be deregulated to allow
greater velocity in the sales of goods and services.