Subject: IN/ECON: KMP - High Interest Rates Only Temporary
INDONESIA-P
Kompas - All translations 'as received.' - John
Kompas Online
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Wednesday, 13 March 1996
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HIGH INTEREST RATES ONLY TEMPORARY
Jakarta, Kompas Online
High bank interest rates will only prevail until the economic climate
has been sufficiently cooled and inflation levels and the trade
deficit are under control, maintained the Chairman of the National
Private Bank Association (Perbanas) Trenggono Purwosuprodjo in a
parliamentary meeting on Tuesday (12/3).
Trenggono confirmed that high interest rates had contributed to an
increase in private investment and a subsequent overheating of the
economy, marked by high inflation. He also spoke of the difficulties
in overcoming the problem of private national banks violating the
Maximum Credit Limit (BMPK). Poor professionalism has resulted in an
ill-defined relationship between owners and banks, he said.
Interest rates, he explained, are influenced by several internal and
external issues. On the micro level, high credit demand which exceeds
fund availability can lead to interest rate increases. This has a
negative impact on macro-economic policies.
Conversely, on the macro level, interest rates represent a means
through which to control the circulation of funds. Because of
Indonesia s overheated economy the real interest rate has had to be
controlled.
Perbanas, said Trenggono, has concluded that the target investment for
the sixth five year plan (Pelita VI) will not be disturbed by the
current situation. Now the principle problem is how to control growth
exacerbated by high domestic demand.
In response to a question posed by parliamentary member Djimanto,
Trenggono reiterated that economic policies concentrated on cooling
down the economic climate without influencing investment targets. Such
an economic policy must involve both the monetary and real sector.
Elaborating on the BMPK violations, Trenggono called for clearer BMPK
policies. Banks should restrict the amount of credit by increasing
investment or reducing the number of credit facilities, he said.
Elimination of levies, said Trenggono, is one policy effecting the
real sector whereby the costs of production and subsequently the costs
of goods can be controlled.
The present inflation rate has been effected by the high import rate
of both consumption and production goods.
The price level has been largely determined by increases in the public
s purchasing power and in turn high consumption levels. Price rises is
influenced by the supply and rapid circulation of money, explained
Trenggono.
In relation to international rating, Indonesian entrepreneurs and
banks only receive two percent on overseas loans because of SIBOR
(Singapore Inter-bank Offered Rate) and LIBOR (London Inter-bank
Offered Rate) stipulations. Trenggono said to reduce this rate the
macro and micro economy had to improve.
LIBOR is the average interest rate offered on the market between banks
in London comprising the Bank of America, the Swiss Bank Corp, Baclays
Bank International, Deutsche Bank and the Bank of Tokyo. At present,
LIBOR and SIBOR stand at about 5.3125 percent for monthly loans.
This SIBOR and LIBOR interest rate, however, only apply to countries
with a low business risk or a good rating. According to Koesmoeljono,
President Director of Bank Nusa, as far as overseas loans are
concerned Indonesia far exceeds Malaysia. This is largely caused by
Malaysia s high rating (AA minus) while Indonesia has a rating of BBB
minus. If Indonesia s rating improves, says Koesmoeljono, then
overseas loans, defined by LIBOR or SIBOR, will be reduced by about
0.5 percent.
Trenggono also stressed the necessity in improving Indonesia s risk
rating. Risk, he said, is aggravated by poor macro economic conditions
reflected in a large current account deficit, high inflation and major
bank upheavals.
In order to cool down the economy, Koesmoeljono suggested mergers of
government banks. In this way the government bank investment structure
will become stronger and the rating will improve, he said.
An interest rate of two percent offered under LIBOR - which usually
stands at five percent - is indicative of the international
apprehension in providing a country with funding.*
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