Euro could benefit Indonesia<\/p>\n
This is the second of two articles based on an excerpt of a
\npaper presented at the ABN-AMRO Conference on the European Single
\nCurrency on June 17 in Jakarta by J. Soedradjad Djiwandono, a
\nprofessor of economics at the University of Indonesia and
\nGovernor of Bank Indonesia.<\/p>\n
JAKARTA: The presence of a strong euro will also mark the
\nbeginning of a system of currency blocs, of which I expect there
\nto be three: the U.S. dollar, the yen and the euro. The euro will
\nbe a major international currency, leading to a greater degree of
\nsymmetry between the major international monetary systems.<\/p>\n
This should increase the opportunities for better cooperation.
\nMore speculatively, if the euro and the yen come to have as much
\ninternational importance as the dollar, we may see that certain
\ncommodity prices are no longer driven.<\/p>\n
This could allow some currencies tied to the dollar to
\ndecouple and attach themselves to one of the other two bloc
\ncurrencies. We may ask what effects this segregation of the
\nworld's currencies into blocs would have. I believe that, again,
\nit may be too early to tell but it may affect currencies in
\ndifferent ways.<\/p>\n
The result of having fewer currencies to manage should make
\ncoordination between policymakers at an international level
\neasier. In this way, currency crises should become easier to
\navoid. Furthermore, the firepower of each of the blocs would be
\nbigger.<\/p>\n
This would make them better able to defend their currencies
\nfrom attack. On the other hand, the creation of currency
\nstability within each bloc might lessen bloc members concern
\nabout currency movements between the blocs.<\/p>\n
For many Asian countries, the benefit of currency stability
\nwithin each bloc is obvious. Given their traditional dollar-
\ndenominated exports, short-term dollar volatility and its
\nassociated costs to exporters, this would be unwelcome to many
\nAsian countries. Exports would become more volatile and this
\ntransmission of international volatility into domestic markets
\nwould be detrimental to Asian economic growth.<\/p>\n
As far as Indonesia is concerned, it seems to me that there
\nare compelling opportunities for which we have to position
\nourselves, even though, as I have already acknowledged, some
\npotential problems still need to be addressed.<\/p>\n
As I pointed out earlier, the euro will create the second-
\nlargest capital market in the world and both our private and
\npublic sectors should organize optimum access to it.<\/p>\n
The magnitude of this new pool of funds will be such that no
\ninvestors or borrowers will be in a position to ignore it. Those
\ninvestors and issuers that are not already learning will have to
\nlearn how to interpret it.<\/p>\n
New market participants will emerge, some being formerly
\ndomestic institutional investors. They will discover a universe
\nof international issuers, some of whom will be from emerging
\ncountries. Financial institutions will position themselves to
\nintroduce newcomers to the market.<\/p>\n
Analysts trained in U.S. markets, where emerging market
\nissuers are known already, will assist European investors to
\nassess the respective creditworthiness of these issuers. Ratings
\nfrom U.S. or European rating agencies will be used in entering
\nthe new market. With the low interest rates currently prevailing
\nin Japan, the United States and Europe, investors will be looking
\nfor higher returns from new issuers which offer safety, quality
\nand higher yields.<\/p>\n
Issuers will also, in turn, learn how to understand European
\ninstitutional investors, which resources to tap and how to
\napproach these new sources of funds. European investors must
\nposition themselves among their peer group, while issuers will
\nalso position themselves with these new investors, a phenomenon
\nthat is already occurring.<\/p>\n
In a world which is becoming global, both investors and
\nborrowers are diversifying and looking for new opportunities or
\nnew sources of funds.<\/p>\n
From Indonesia's point of view, a window of opportunity is
\nopening. The euro market meets many of the criteria used by the
\nRepublic of Indonesia in its traditional approach to financial
\nand capital markets: pragmatism and prudence; borrowing when
\nmarkets are favorable and conditions attractive; and tapping the
\nmarket when it offers something of specific interest, such as
\nbenchmarking or a true diversification of sources of funds.<\/p>\n
When Indonesia approached the Yankee bond market in July 1996,
\nfor example, its first objective was benchmarking. In the future,
\nif Indonesia were to approach the euro market, it would probably
\nbe to diversify its sources of funds and to present the
\nRepublic's name to a new universe of investors who are unused to
\nthe Indonesian name and risk.<\/p>\n
By raising the level of awareness of European institutional
\nand retail investors in our country, we would be able to pave the
\nway for other Indonesian borrowers.<\/p>\n
Lately, I have been making preliminary approaches for such a
\npurpose. A couple of months ago, by the invitation of the
\nIndonesian Embassy in Brussels and Bank Brussel Lambert, I made a
\npresentation in front of the Belgian banking and financial
\ncommunities.<\/p>\n
And less than two weeks ago, I met with different banking and
\nfinancial industries in several meetings in Paris, organized by
\nthe Caisse des Depots et Consignations Group to start the
\ncampaign.<\/p>\n
On the borrowing side, if it borrowed in the new market,
\nIndonesia could elect to keep some euros to diversify its
\ncurrency reserves and to match its liabilities.<\/p>\n
Or, alternatively, it could change the euros into dollars,
\nwhich is still the natural currency of Indonesia. On the
\ninvestment side, the euro market could be equally attractive for
\nIndonesia, offering a series of diversified borrowers which have
\nso far not tapped anything but a limited pool of the largest
\ninvestors. More opportunities will, therefore, be offered to
\nIndonesian investors with varying degrees of risk and yield.<\/p>\n
The development of a single market with a single currency
\nshould, moreover, lead us to consider further the currency
\ndenomination of our exports to the European market and the
\nimplications for our future asset and liability management. In
\naddition, the euro might become one of the main reserves
\ncurrencies.<\/p>\n
The Indonesian banking industry could be among the first
\nIndonesian users of the euro market. The ability to access a new
\nmarket with new products and new participants, on both the asset
\nand liability side of the industry, will be of considerable
\nbenefit to our banking sector.<\/p>\n
Our banking industry can be expected to be approached by its
\nEuropean counterparts for information and for access to the new
\nmarket. Our banks, in turn, will share part of the responsibility
\nfor educating their Indonesian customer base of European
\nopportunities and assisting them in the conversion process.<\/p>\n
Indonesian imports and exports could be denominated in the
\neuro. The development of European financial transactions for
\nIndonesia will parallel the development of trade activities. The
\nlonger-term anticipated reduction in exchange rate uncertainty
\nshould foster trade and hopefully foreign direct investments in
\nIndonesia. One can hope that the creation of this large market
\nwill contribute to more investment in and increased financial
\nflows to Indonesia.<\/p>\n
Another important question for us will be what will happen to
\nour existing debt denominated in currencies that will be
\nconverted into euros, the rate of interest that will apply and
\nhow the legislation that determines these issues will be
\nformulated?<\/p>\n
For Indonesian borrowers, the conversion into euros of
\nexisting debt facilities in European currencies will have the
\nmajor advantage that, instead of dealing with several European
\ncurrencies, we will be dealing with one.<\/p>",
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