Indonesian economy not ruined (2)<\/p>\n
By C.J. de Koning<\/p>\n
This is the second of two articles on the Indonesian currency.<\/p>\n
JAKARTA (JP): Managing risks of foreign currency lending to
\nIndonesia in general requires across-the-board transparency. The
\nvolume of outstanding loans, for instance, needs to be readily
\naccessible at any given time. Otherwise, no reliable cash-flow
\npicture can be drawn up.<\/p>\n
The maturity profile of the total portfolio also needs to be
\nestablished; a shorter average maturity carries a higher risk for
\nIndonesia.<\/p>\n
Furthermore, a distribution ratio over government borrowing in
\nthe international market versus private sector borrowing from
\nabroad needs to be established. In general, foreign currency
\nborrowing by a government contributes more slowly to creating
\ndaily disposable income than private sector borrowing. A 30:70
\nratio may be considered. With such a ratio, government companies
\nshould be included under the government sector for firms which
\nguarantee payments in U.S. dollars on the basis of rupiah income.<\/p>\n
A risk-reducing measure would be to limit the total volume of
\nforeign currency loans taken up by Indonesia at any one time. It
\nmay be considered to link this volume to the export earnings of
\nthe country and decide, for instance, on a ratio of total foreign
\ncurrency borrowing at twice the export earnings of Indonesia.<\/p>\n
Another risk-reducing measure would be to measure and publish
\nregularly the volume of foreign loans used for Indonesian import
\nand export finance and their average maturity.<\/p>\n
The second type of risk concerns the foreign currency payment
\nand settlement. In the past year, many imperfections have
\nappeared in the Indonesian foreign borrowing markets. Some
\ncompanies did not inform their banks of other foreign currency
\nobligations held by them, thereby increasing the risks for
\nforeign lenders.<\/p>\n
The behavior leads to higher overall pricing for Indonesian
\nrisks and lower levels of available funds. The Indonesian Debt
\nRestructuring Agency (INDRA) may in the future collect these
\ntypes of data and make them available at the request of a
\npotential foreign lender, with the approval of the borrower.<\/p>\n
On the other hand, foreign banks may be requested to register
\ntheir exposure on Indonesian corporate risks with INDRA. Again,
\nan effective database system lowers the risk profile of foreign
\nlending and borrowing, and strengthens the access of well
\nperforming companies to the relatively cheap international money
\nand capital markets.<\/p>\n
Another aspect of the risk pattern is settlement of payment
\ndifficulties. A new bankruptcy code has been enacted in cases
\nwhere the outlook for payments is bleak. There are, however, many
\ncases where prospects for a company are good but some temporary
\nliquidity problems occur. In such cases, it would be helpful if
\nthe concept of \"wise men\" could be introduced. The assistance
\ncould be called for either by the foreign lenders or by the
\nindividual borrower. The aim would be to overcome temporary
\nliquidity problems rather than seek debt forgiveness; the latter
\nshould only be decided by a bankruptcy court.<\/p>\n
The third risk for foreigners in participating in the
\nIndonesian economy lies in counter-party risks. For example, it
\nwould be helpful if banks which are allowed to deal with foreign
\ncounter-parties were capitalized and audited along international
\nstandards rather than local ones. This would lower the risk
\npremium for Indonesia and increase the potential to bring in more
\nforeign funds.<\/p>\n
The same applies for companies wishing to have foreigners as
\ntheir shareholders -- again, international auditing standards may
\nbe applied. This lowers the risk premium and makes it more
\nattractive for foreigners to buy such shares.<\/p>\n
A third example of lowering risks concerns government. The
\nInternational Monetary Fund (IMF) and\/or the World Bank may
\nconsider creating a credit risk rating for governments, where
\ntransparency in dealing with foreign funds is rated.<\/p>\n
Implementation of all these measures would substantially
\nreduce the risks of doing business in Indonesia.<\/p>\n
Still, much of the motivation of foreigners to keep or
\nwithdraw funds has more to do with their own individual
\ncircumstances. For instance, it is probable a number of Japanese
\nbanks would have withdrawn from the Indonesian market in any
\ncase, due to their domestic situation.<\/p>\n
U.S. fund managers may change their current investment
\nbehavior and opt for other markets. The withdrawals may start to
\nfeed on themselves, as we have seen in the past six months.<\/p>\n
Risk reduction also means an orderly replacement of one type
\nof funds provider for another in case such withdrawals threaten
\nto cause the exchange rate to overshoot.<\/p>\n
Two \"buffers\" may be created, one with the help of Bank
\nIndonesia and the other with help of the IMF\/World Bank and
\nforeign governments.<\/p>\n
The first type may be called the \"Liquidity Equalization
\nMethod\", under which Bank Indonesia issues promissory notes (SBI)
\nin dollars for periods of one week, one month and three months as
\na premium rate over the London Inter-bank Offered Rate (LIBOR).<\/p>\n
This premium would be charged to all foreign currency
\nborrowers on an equal basis as a temporary equalization tax. The
\neffects are that lender replacement takes place and the risk of
\novershooting of the exchange rate is cut considerably.<\/p>\n
The second type may be a general agreement to borrow from
\nintergovernmental sources. Again, lender replacement is the key
\ndriving force behind this facility. The facility can be a
\npermanent agreement to cover the situation that Indonesia -- as a
\ncountry, having maintained its international risk profile along
\nthe risk management lines set out above and having used the
\nliquidity equalization method described above -- would still need
\nsome liquidity in dollars to cover short-term liquidity
\nshortages. The IMF and the World Bank, perhaps supported by a
\nnumber of central banks, could agree to buy dollar SBIs from Bank
\nIndonesia, again at rates well above LIBOR.<\/p>\n
Both the private sector variant and the intergovernmental
\nvariant make dollar liquidity available at very short notice and
\nat the time when the damage of overshooting the currency has not
\nyet occurred. The price to pay is an extra interest charge rather
\nthan a complete economic upheaval.<\/p>\n
Even in the current situation, where the overshoot has taken
\nplace for a short period, the corrective mechanism of the
\nliquidity equalization method can be applied successfully. Of
\ncourse, some structural support measures may also be needed to
\nshore up the battered equity positions of many companies. But the
\nIndonesian economy does not need to be ruined because it can be
\nrun and managed.<\/p>\n
The writer is ABN AMRO Bank's country manager for Indonesia.
\nThis article is written in his private capacity.<\/p>",
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