Crash liquidity injection<\/p>\n
Official announcements last week brought in what the
\nIndonesian Chamber of Commerce and Industry (Kadin) saw as winds
\nfrom heaven to soothe the business community which has been
\nburning in the \"hell\" of a liquidity crunch since August. If the
\npledges materialize, no less than Rp 40 trillion in new funds
\nwill be injected into the economy within the next few months.
\nThat will represent as much as 12 percent of the total money
\nsupply (broadly defined) as of September.<\/p>\n
Bank Indonesia's (central bank) Director Muchlis Rasyid said
\nRp 20 trillion in funds from state companies would be disbursed
\nin loans to small and medium-scale enterprises (SMEs) starting
\nnext month. That amount will be in addition to the Rp 3 trillion
\nin funds from PT Jamsostek, the state-owned social security
\ncompany for private-sector employees, which President Soeharto
\nhad previously ordered to be lent to SMEs and low-cost housing
\ndevelopers.<\/p>\n
The President was quoted by Aburizal Bakrie, Chairman of
\nKadin, as saying in Cape Town, South Africa, on Friday that US$5
\nbillion (Rp 17 trillion) in funds derived from Singapore's
\nstandby loan would also be injected through state banks as
\ncredits to medium and big businesses. The battered stock exchange
\nwill also get a shot of boon. Soeharto has ordered state
\ncompanies to use up to 1 percent of their net profits to buy
\nshares on the Jakarta Stock Exchange to reinvigorate the exchange
\nwhich has lost 47 percent in market capitalization since July.<\/p>\n
No technical details were immediately available on how the
\ncrash liquidity injection would be implemented, but the
\ngovernment has assured businesspeople that all those funds will
\nbe lent at an annual interest of 17 percent, much lower than the
\ncurrent market rate of 27 percent to 30 percent.<\/p>\n
Further clarification is especially needed for the
\ndisbursement of the Singapore standby loan. Finance Minister
\nRichard Hu assured the Singapore Parliament last week and the
\nMonetary Authority of Singapore reiterated yesterday that the
\nloan would not be used unless the IMF-led $23 billion first-line
\ndefense assistance had already been used up. Another puzzling
\nquestion is why the government chose foreign debts to inject
\nliquidity. In the past, all credit programs which offered below-
\nmarket rates were funded by liquidity credits (refinancing
\nfacility) from the central bank. Drawing down on foreign debts at
\na time when the rupiah rate is still highly volatile is a
\ndangerous game.<\/p>\n
The government should obviously address the plight of the
\nbusiness community as the private sector has been the locomotive
\nto growth since the early 1990s. But notwithstanding the great
\nrelief the new funds would bring to the cash-strapped business
\nsector, the crash liquidity pumping program is still raising
\ngreat concerns. Past experiences show that government-directed
\nmass lending programs often override prudential requirements. The
\nexecution of programs based on presidential instruction often
\nignores economic rationale even though the objective is
\ncommercial interest. Since the credits will be extended through
\nstate banks the risk is quite big that political influence may
\nweigh more than the commercial viability of the borrowers, as
\nshown by the high rate of bad credits among state banks.<\/p>\n
Prudential lending measures are especially crucial now as the
\ngovernment is strengthening the financial sector as part of the
\npainful stabilization program agreed with the International
\nMonetary Fund. It is therefore most imperative that the lending
\nof these huge funds be made strictly on viable credit assessment
\nand fully in a transparent manner and be directed to export and
\nexport-related activities. Finance Minister Mar'ie Muhammad
\nassured the House of Representatives last week that the
\ngovernment had no plans to bail out, directly or indirectly,
\nprivate companies over foreign debts.<\/p>\n
If some of the funds were extended to bail private companies
\nout of foreign debts, the private sector would never learn from
\nits mistakes and greed, which are responsible partly for our dire
\neconomic condition now. Further down the line, the concerted,
\ncostly efforts to regain the market confidence in the economy
\nwould suffer a great setback. The stabilization program
\nconsequently would take much longer and the pains would get more
\npainful. For the umpteenth time, we must make this point: It is
\nthe snail's pace progress in the improvement of bad governance
\nthat has been mainly responsible for the nation's inability to
\nregain market confidence despite the IMF backup.<\/p>",
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