Securitization process a dilemma for BI

JAKARTA (JP): The current securitization of assets and liabilities is putting Bank Indonesia in a delicate position, said the central bank governor, J. Soedradjad Djiwandono.

He told a two-day Indonesian capital market forum here yesterday that the securitization process is needed to catch up with traditional banking activities.

"Over the last two years, we have seen an increasing securitization of assets, a trend which may well become the wave of the next millennium," Soedradjad told the forum, hosted by Euromoney magazine.

As the securitization process continues, the current development in private debt securities will probably lead to the rapid expansion of securities products, both in money and capital markets.

"Led by rapid progress in the capital markets, the direct financial system now has also moved to the forefront in the development of private debt securities such as commercial papers, medium-term notes, bonds and asset-backed securities," he noted.

Soedradjad said that the current securitization process is making a positive contribution to the country's development, especially in promoting the mobilization of funds. "It gives businesses alternative sources of finance."

At the same time, Soedradjad said, the process helps prepare Indonesia's financial system for globalization in the financial sector.

"The global financial system is already a reality in this country, especially in relation to money market and capital market activities," he said.

He said the process of asset and liability securitization, however, has put Bank Indonesia in a very delicate position.

"We face two dilemmas. First in the process of disintermediation... Then there will be more pressure on the currency as well as on our monetary management capacity," Soedradjad said.

The process of disintermediation, caused by the rapid growth of direct financing, will certainly lead to greater competition in the banking system.

Prospective depositors as well as borrowers will eventually have more deposits or financing alternatives. Prospective borrowers can raise funds by issuing debt instruments, and prospective depositors can invest their money in these debt instruments.

"From history, we can see how events progressed in the United States before World War I, when there was a clear separation between the banking system and the capital market, just as in the United Kingdom," Soedradjad said.

Distinction

That distinction, however, was gradually blurred by the development of the stock market, which forced banks to get involved in the capital market, he continued.

"History is repeating itself here, with closer relations between the capital market and banking system. This has also happened in Europe," Soedradjad said. "I am predicting that a similar development will take place in Indonesia early in the new millennium."

"The central bank has to walk cautiously between the objective of maintaining a prudent banking system and maintaining the same level of growth in the system," he continued.

In addition, Soedradjad said, the threat of a major pull-out by foreign investors has put pressure on the central bank to err on the side of caution.

"It is understandable, that other countries such as South Korea and Taiwan are still very cautious with regards to a wider foreign presence in their domestic stock exchanges," he said.

Despite this vulnerability to major pull-outs by foreign investors, Indonesia will continue to open up its financial and capital markets for foreign investors while maintaining a certain level of prudence, Soedradjad said.

"I believe I speak for everyone in our banking system when I say Indonesia looks forward to the next century with great confidence," he said. (rid)