Indonesia Inc.: Dream or reality?<\/p>\n
By C.J. de Koning<\/p>\n
This is the second of two articles on the capricious value of
\nthe Indonesia's currency.<\/p>\n
JAKARTA (JP): Last year before the crisis started in July the
\nIndonesian government maintained a balanced rupiah budget, which
\nit still does. The Indonesian government did not borrow at all on
\nthe rupiah market to complement its tax income.<\/p>\n
In other words the government did in no way contribute to an
\nexcessive consumption pattern. It behaved extremely prudently.
\nLocal price developments also did not show substantial strains in
\nthe system.<\/p>\n
First half year inflation was running at some 6.5 percent per
\nannum, in line with longer term inflation trends. Also wages did
\nnot rise explosively. There was no significant wage pressure on
\nprices.<\/p>\n
In Indonesia for most companies wages account for less than 25
\npercent of total costs. On the export side, Indonesian goods
\ncontinued to be sold overseas. There was no clear indication that
\ngoods had become too expensive, especially since Bank Indonesia
\nallowed the rupiah to depreciate with some 5 percent per annum
\ntowards the U.S. dollar.<\/p>\n
The World Bank's conclusion was that in principle the economic
\nfundamentals were sound -- of course there were inefficiencies in
\nthe system which could be improved. I fully endorse this view
\nlooking from the rupiah side.<\/p>\n
What happened at the U.S. dollar side however? As indicated,
\nIndonesia's outstanding loans are for around 80 percent in
\nforeign currency. Its savings also, but most of such savings are
\nnot kept with institutions in Indonesia.<\/p>\n
During the last 8 months exports grew steadily, with the
\nanecdotal evidence of the last few weeks that exports are also
\nstagnating and declining due to lack of raw materials and other
\nproduction inputs as well as lack of U.S. dollar working capital
\nand the total lack of L\/C facilities.<\/p>\n
On the U.S. dollar loan side three things happened. Firstly --
\nas a consequence of the crisis in Thailand -- some companies in
\nIndonesia started to cover part of their open currency positions,
\nin view of the increased uncertainty about the expected
\ndepreciation level of the rupiah. This put already a strain on
\nthe rupiah - dollar exchange rate.<\/p>\n
The second factor was the maturity profile of the external
\ndebt, especially the corporate sector debt. There was and up till
\ntoday still is, no collective management of Indonesia's foreign
\ncurrency debt.<\/p>\n
My estimate was that the average maturity of the corporate
\nsector debt was 1.5 years, with a tendency to become shorter as
\nall foreign currency loans become due and payable when a debt
\nfreeze is announced per company.<\/p>\n
This is exercised through the cross -- default clause. One
\nshould not under estimate the size of this situation. All
\ncorporate debt of Indonesia is some US$ 84 billion currently.<\/p>\n
A 1.5 year average maturity leads to some US$ 59 billion in
\nforeign currency debt service obligations, more than the total
\nexports of Indonesia expected for 1998 (US$ 58 billion). Again
\nthe attempt by companies to honor their commitments put an
\nextreme strain on the rupiah -- dollar exchange rate.<\/p>\n
The third factor was the decreased tendency by foreign banks
\nto roll-over their foreign currency loans, and to extend new
\nloans. During the second half of last year BIS figures - when
\npublished - will show that in the second half of 1997 and the
\nfirst six weeks of 1998 the volume of outstanding foreign
\ncurrency loans declined sharply.<\/p>\n
If the current financial crisis is caused by the U.S. dollar
\nside of the rupiah dollar equation, then the solutions also need
\nto be found on the U.S. dollar side.<\/p>\n
For instance a Currency Board System would currently be
\ninadvisable for its focus is on the rupiah side of the equation
\nand does not solve the U.S. dollar liquidity crisis that
\nIndonesia is currently facing. Perhaps in some years a Currency
\nBoard System could work if the loan currency of Indonesian
\ncompanies would be in majority in rupiah rather than in U.S.
\ndollars.<\/p>\n
How can the current U.S. dollar liquidity crisis be solved ?<\/p>\n
A number of efforts have been made already from the foreign
\nside:<\/p>\n
* IMF has agreed to a package of US$ 43 billion with the
\nassistance of a number of foreign governments. One observation
\nmay be made that so far the channeling of such funds to the
\nIndonesian corporate sector has not taken place. It is in the
\ncorporate sector where the foreign currency liquidity is really
\nneeded in order to kick-start the economy.<\/p>\n
* Dr. Goh Chok Tong, prime minister of Singapore launched the
\ninitiative to help Indonesian corporates with pre-export and
\npost-import finance via an Indonesian Trade Finance Guarantee
\nFacility. On Feb. 3, 1998 he suggested such a Facility to
\nPresident Soeharto. Van Mierlo, deputy prime minister of the
\nNetherlands also supported the facility in his discussions with
\nSoeharto on Feb. 12, 1998. Other governments are considering
\nparticipating in the Facility.<\/p>\n
* One of the key issues for foreign currency liquidity management
\nis to see to it, that the obligations to pay do not exceed the
\nability to pay. The latter derives from the net export earnings
\ncapacity, the earlier from the foreign debt volume and its
\nmaturity profile. A foreign currency debt restructuring effort is
\nunderway, but may take some months before being finalized. In
\nthis connection I suggested earlier to set up an Indonesian
\nCredit Clearing Corporation as an instrument for better foreign
\ncurrency liquidity management.<\/p>\n
But more can be done, also from the Indonesian side.
\nFor instance:<\/p>\n
* Measures to re-attract Indonesian foreign currency savings back
\nto Indonesia. It is not difficult to give a tax amnesty to
\nIndonesians who have saved overseas -- just like India has done
\nwith great success recently. One could establish Offshore Banking
\nUnits of banks based in Indonesia.<\/p>\n
Such OBU's will be units of banks which fulfill the new
\ncapital requirements of Rp 1, 2 and 3 trillion in the period as
\ndecided by Bank Indonesia. Such OBU's will be in Indonesia and
\nsupervised by Bank Indonesia.<\/p>\n
If such OBU's get the right to attract foreign currency
\nliquidity, with a waiver for withholding taxes, if for instance
\nfunds are committed for a one year period or more than it is
\nlikely that substantial foreign currency funds from Indonesians
\nand other nationalities can be attracted. Also - just like in
\noffshore centers -- income tax could be waived, over such funds
\nplaced in OBU's<\/p>\n
* A second initiative could be by launching an \"I love Indonesia\"
\ncampaign, whereby Indonesian savers overseas can inform their
\nprivate bankers overseas that they pledge say 20 percent of their
\nprivate wealth to help Indonesia, for a period of say two years.
\nSuch banks would inform their Central Bank of the amounts
\npledged, and these Central Banks would inform IMF on a no-name
\nbasis.<\/p>\n
Those pledged funds could then be used as collateral for the
\ncross-border guarantees needed in the Indonesian Trade Finance
\nGuarantee Facility. Hopefully many patriotic Indonesians of all
\nranks and file will want to participate in such scheme. This can
\nbe arranged on an anonymous basis.<\/p>\n
* A third foreign currency liquidity raising measure is to use
\nthe asset values embedded in state-owned corporations. It will
\nnot be difficult to arrange a substantial size \"product loan\" on
\nfuture deliveries of say oil and gas to prospective buying
\ncountries. A long term sales agreement on such future deliveries
\ncould easily raise many billions of U.S. dollars.<\/p>\n
* Last but not least, many foreigners would like the right to
\nlease Indonesian land or buildings for a period of say 99 years.
\nIf Indonesia arranges this and protects foreign lease holders
\nfrom local administrative hassles, then a substantial foreign
\ncurrency liquidity flow could be started.<\/p>\n
A combination of these foreign and domestic actions would show
\nthe market that Indonesia is clearly addressing the 80 percent
\nfactor and that -- once exports and imports start flowing again -
\nthe likelihood of reaching Rp 5,000 per U.S. dollar is clearly
\nwithin reach.<\/p>\n
The anticipation of the markets -- as always -- will do the
\nrest. Let the market do the price fixing for the rupiah but let
\nthe market also know that foreign currency liquidity management
\nis now on top of the economic management agenda of Indonesia Inc.<\/p>\n
Drs. C.J. de Koning is Country Manager Indonesia for ABN-AMRO
\nBank.<\/p>",
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