Is a stronger rupiah already around the corner?<\/p>\n
By C.J. de Koning<\/p>\n
JAKARTA (JP): One of the characteristics of some economists is
\nto predict the future on basis of past experience. In other words
\nif the rupiah depreciates toward the U.S. dollar over time then
\nit is an easily acceptable prediction to see the rupiah fall
\nfurther.<\/p>\n
What is harder, is to predict the timing of the turn around
\npoint, but if history is any guide to financial markets what
\ncomes down must come up again.<\/p>\n
In this article I would like to explain why I expect the turn
\naround point for the rupiah to be near.<\/p>\n
If Indonesia conducted its international trade relations on a
\nforeign currency cash only basis, its economy could grow but at a
\nlower pace that it did so in the past 25 years.<\/p>\n
Indonesia -- just like all developing countries -- is a net
\ncapital importer. It uses foreign currency loans for all kinds of
\neconomic activities, mostly to invest in factories, power plants,
\nroads, education and in inventories. On top of this, foreigners
\nsometimes buy Indonesian equities and (rarely) real estate.<\/p>\n
There is absolutely nothing dishonorable in being a foreign
\ncurrency capital importer. But capital imports do not come in for
\nfree and need to be \"serviced\" which means that interest and
\nprincipal need to be paid back at some stage.<\/p>\n
Indonesia has built up a foreign currency borrower position.
\nThe government has outstanding debt of some US$53 billion and the
\nprivate sector some $65 billion in bank debt and another about
\n$15 billion in debt arranged via capital markets, the latter
\ninclude commercial paper, certificates of deposits, medium term
\nnotes etc. In total some $133 billion.<\/p>\n
Just like a company, once you incur debt it has to be managed.
\nThe Indonesian government has handled its own foreign debt
\nextremely well. It attracts funds with very long maturities,
\noften with seven year grace and eighteen year repayments. Its
\naverage cost of funds is very low.<\/p>\n
It has spread its debt over a number of currencies, including
\nEuropean currencies and the Japanese yen, the latter two have
\nfallen substantially toward the U.S. dollar in the last year.<\/p>\n
Over the last couple of years the Indonesian government has
\nprepaid about $3.5 billion in relatively high interest loans
\nmainly from World Bank and ADB.<\/p>\n
The government also receives foreign aid to the amount of
\nbetween $5 billion to $6 billion every year.<\/p>\n
Since 1967 the government has maintained a balanced budget. It
\nhas no local rupiah debt, a great exception among developing and
\ndeveloped nations alike. There is no government bond market in
\nrupiah.<\/p>\n
The foreign currency debt incurred by the Indonesian
\ngovernment has always been used to finance specifically approved
\nprojects, rather than for current government expenditure.<\/p>\n
The local rupiah budget of the government for fiscal year
\n1998\/1999 is Rp133 trillion which at Rp8,000 to the U.S. dollar
\ntranslates to $16.6 billion only.<\/p>\n
Over 1998 the external debt service (principal plus interest)
\nof the government debt can be estimated at about $7.8 billion. As
\nthe debt is incurred in various currencies, currency fluctuations
\nare likely to make this figure even lower in U.S. dollars.<\/p>\n
For 1998 total export proceeds (f.o.b.) can be estimated at
\nsome $58 billion for Indonesia, imports (c.i.f) are likely to
\ndrop due to current circumstances to some $42 billion, and a very
\nhealthy trade surplus of some $16 billion can be expected for
\nthis year. The service sector deficit (excluding interest
\npayments) can be estimated at some $8 billion which leaves a
\ncurrent account cash flow surplus of some $8 billion before
\ninterest settlement. Unusually positive for a developing country.<\/p>\n
For the Indonesian private sector, companies' individual
\ndecisions have been taken by foreign banks and local companies to
\nborrow in foreign currency, mostly U.S. dollars, to the extent of
\n$65 billion. This debt is predominantly incurred by some 50
\nconglomerates together with some 100 financial institutions.<\/p>\n
On top of this, foreign institutions have bought some $15
\nbillion in short term CP's\/CD's. The average agreed maturity for
\nthis private sector external debt is about 1.5 years. This
\nimplies that in 1998 the total debt service requirement is some
\n$49 billion out of the bank debt and a further roughly $10
\nbillion out of the CP\/CD etc. programs.<\/p>\n
For a country there are only a few sources of foreign exchange
\ncash which do not represent borrowings. They are export proceeds,
\nforeign direct investments and overseas remittances (workers to
\nfamilies, students and foreign aid).<\/p>\n
The foreign currency debt service of both government and the
\nprivate sector has to be paid out of the same country \"earnings\".
\nQuite obvious but sometimes forgotten.<\/p>\n
So far the current status points quite clearly to the
\nfollowing facts:<\/p>\n
There is nothing wrong with the government's external debt
\nprofile. It is conservative and well managed. The individual
\ndecisions of foreign bankers and local companies and foreign debt
\nbuyers and local companies do not add up to a collective sound
\ndecision.<\/p>\n
Average maturity of debt of 1.5 years is unrealistically short
\nand not in line with the country's forex earning capacity.
\nCollective management of private sector debt has not been
\npracticed, which has led to the currency upheaval.<\/p>\n
A few fundamental questions can be raised about this
\nsituation.<\/p>\n
Is it normal that a developing country has a debt service
\nprofile which requires it to pay back $56 billion in principal
\nout of a total debt of $133 billion (about 42 percent) in 1998.<\/p>\n
Answer: Of course not. The total level of debt of $133 billion
\ncan easily be serviced if a different maturity profile is agreed
\nupon. Why would the world require Indonesia to become a net
\ncapital exporter. Illogical and damaging for Indonesia but also
\nfor the rest of the world.<\/p>\n
The second question: Is the level of external debt not
\nexcessive. Compared to Indonesia's riches in mineral wealth, in
\nland and other natural resources, its established infrastructure
\nand real estate, this debt level is extremely small.<\/p>\n
Compared to its foreign currency cash flow it is sustainable,
\nbut for one or two years the level should not be increased.<\/p>\n
In order to talk relative size, compare Indonesia's total
\nexternal debt with the balance sheet of a major European bank. It
\nonly constitutes about 37 percent of the balance sheet of only
\none of such major European banks.<\/p>\n
A third question: Can a new private sector individual as well
\nas collective maturity profile be agreed upon?<\/p>\n
Of course it can. It requires the cooperation of about 100
\nforeign banks and some 50 conglomerates in Indonesia. But is in
\nevery one's best self interest to do so, including foreign
\ngovernments.<\/p>\n
Another question: Should Indonesia seek a moratorium as some
\nforeign press reports indicate?<\/p>\n
In my view this represents accepting defeat and going into
\nliquidation rather than continuing as a going concern. There is
\nabsolutely no reason for Indonesia to liquidate. Its asset values
\nfar outstrip its liabilities obligations and the country has a
\nhuge \"net worth\". It needs to readjust its private sector debt
\nindividually and collectively, but this can be done and in my
\nview will soon be done under the guidance of Radius Prawiro and
\nhis team.<\/p>\n
Why do I think that the rupiah turn around is near. It is
\nbecause I think the problem is -- in world terms -- relatively
\nsmall. It does not need substantial additional funds, but rather
\nsome rearranging of existing debt, which can be done and is
\nhighly likely that it will be done in the very near future. Once
\ndone the positive interest differentials will again attract
\ninvestors to the rupiah.<\/p>\n
My conclusion is : Do not miss the turn around in the rupiah.<\/p>\n
Drs C.J. de Koning is country manager Indonesia of ABN AMRO
\nBank.<\/p>",
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