INDONESIAN GOVT ALERTED OVER U.S. FINANCIAL CRISIS

By Andi Abdussalam
     Jakarta, Oct 5 (ANTARA) - Observers have warned the government to assure the public of its economic resilience against possible impact of global economic turmoil as a result of the collapse in a number of the United States financial institutions.
     "The government should keep an eye on the US financial turbulence. It could affect Indonesia's market in the future if the US government failed to secure approval from the US Congress of its financial bailout package," Eric Sugandi, an economist at Standard Chartered, said.
      The Indonesian market and banking system might not be affected immediately  if the Congress rejected its government's proposal to use US$700 billion of taxpayers' money  to bail out collapsed financial institutions. But in the long run, they might
     "Rejection by the US Congress of the bailout plan will cause a more violent  economic turbulence, the impact of which will be felt by a number of countries in Asia and Europe," Eric Sugandi said.
      According to Sugandi, the government should keep an eye on the global economic turmoil because it was feared fund managers would take anticipatory steps to avoid further losses.
      Fund managers would likely transfer and invest their funds in commodity markets such as crude, coal and gold and this  in turn would lead to other problems.
      With fund managers entering the oil market, the crude price which at present was recorded at US$100 a barrel, would strengthen, he said.
      He said a US Congress rejection of the bailout plan would create a worse economic turmoil as a number of regional stock markets, including that of Indonesia, would be hit.
      The Indonesian central bank (Bank Indonesia/BI) will be required to provide incentives if the  stock market at home is affected. BI was previously expected to raise its benchmark rate to help ease tight liquidity at home but because of the US financial crisis, it should not do so.
      Economic observer Tony A Prasetyantono of BNI bank said he believed BI will maintain its benchmark rate at 9.25 percent due to the financial crisis in the United States.
      He said he initially thought that BI needed to increase its rate because liquidity in the market was relatively tight. Amid the US financial crisis, however, the BI rate needed to be lowered to provide the capital market with incentives.
     "So, there is a tug-of-war between the need to raise the BI rate and the need to lower it," he said adding that  On the one hand, BI needed to raise its rate to respond to the tight liquidity but on the other,  it  had to lower the rate to prevent the stock market from being affected by the US financial crisis.
      Besides having a possible effect on the domestic stock market, the financial turmoil could also have a  psychological impact on bank customers in prompting them to rush the banks.
      Therefore, the Indonesian Chamber of Commerce and Industry (Kadin) called on the government to provide the public with accurate  information on the country's economic resilience so that the US financial crisis would not have an adverse psychological impact on domestic bank customers.
       "Basically, the impact of the United States financial crisis on us is insignificant. But we need to prevent depositors at home from rushing the banks such as has happened in the US, China and Hong Kong," Bambang Soesatyo, chairman of Kadin's Permanent Committee for Monetary and Fiscal Affairs, said on Friday.
        He said the monetary crisis in 1998 peaked when depositors rushed the banks, which was a deadly attack on national banks which forced the monetary authorities to save the banking system by issuing a monetary instrument called Bank Indonesia Liquidity Assistance (BLBI).
       He said in a situation like now, bank customers needed information on the country's economic resilience, such as foreign exchange reserves and banks' ability to provide funds for public fund withdrawals.
      Bambang said each bank usually had main customers who had to be informed that their money remained safe in the bank because Indonesia did not experience a situation like that in the United States now.
      "The most important thing is that banks' liquidity must remain secure. No matter how much money the depositors want  to withdraw, banks should be able to meet  demand," he said adding that in the present situation banks should not create the impression that they were facing a liquidity problem because that would create very dangerous rumors.
      "So, in the present situation, the most important thing is to protect the banking system. The public must be convinced that their money in the bank remains safe so that a rush can be prevented," Bambang said.
      Apart from that, according to Bambang, Indonesia's exports were also likely to be affected. Global market demand for Indonesian goods would drop  as a result  of  the United States' financial crisis which had affected importer countries in the world.
     "The world today is waiting for the United States whether or not it will be able to rescue its financial sector, because the real sector in the world cannot move if the world's banking industry is unable to offer it credits as working capital and funds to buy raw materials," Bambang said. (T.A014/A/HAJM/21:10/A/H-YH))  03-10-2008 21:17:15