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.