No easy way out of RI's crisis<\/p>\n
By Bambang Subianto<\/p>\n
The following is an excerpt from a paper presented at the
\nNational Issues Forum put on by the Brookings Institute and the
\nHarvard Institute for International Development in Washington
\nD.C. on Oct. 2. This is the first of two articles.<\/p>\n
WASHINGTON: In looking at Asia's economic and political
\ndevelopments, one can truly say: \"What a difference a year can
\nmake!\"<\/p>\n
Just a year ago, the World Bank and the International Monetary
\nFund seemed to assume in their annual meeting that Asia's
\neconomic crisis would be speedily resolved and was unlikely to
\nspread much beyond the immediate group of affected countries.<\/p>\n
Today such optimism would be highly misplaced. It is becoming
\nincreasingly clear that we are in the midst of a serious downturn
\nthat shows signs of spreading well beyond Asia.<\/p>\n
Even (U.S. Federal Reserve Commission) chairman Greenspan has
\nbeen forced to take note of the spreading impact of the Asian
\neconomic crisis. He said last week (at the end of September) that
\n\"we have to bring the existing instabilities to a level of
\nstability reasonably shortly, to prevent the contagion from
\nreally spilling over.\"<\/p>\n
In reviewing the events of the last year, perhaps what is most
\nworrisome is the fact that the crisis shows few signs of abating
\ndespite strong policy measures adopted by the affected economies
\nand significant financial assistance provided by multilateral
\nagencies and bilateral donors.<\/p>\n
There is, I believe, a growing consensus that the weaknesses
\nin our banking system allowed the exogenous shocks to our
\neconomies to become magnified and spread.<\/p>\n
The story, while complex in detail, is painfully simple in its
\nbroad outline. Essentially our financial institutions, as well as
\nthose of other Asian economies, encouraged the funding of risky
\nand, in the end, unprofitable ventures.<\/p>\n
Such an outcome was probably inevitable in a financial system
\nwhere state-owned banks play a significant role and, perhaps even
\nmore important, where interference is likely to be pervasive.<\/p>\n
Not only were funds directed to projects that could not
\ncompete in the global marketplace when input and outputs were
\npriced appropriately, but market participants felt that reliance
\non government-directed loans gave such projects an implied
\nguarantee.<\/p>\n
Compounding our difficulties, there was a close link between
\nvarious banks and some of the countries large business groups, or
\n\"conglomerates\".<\/p>\n
Such links further reduced the likelihood that loan requests
\nwould be objectively evaluated. Loans were rarely subject to
\ncareful financial or economic analysis. Such analysis was
\nhandicapped by the absence of disclosure requirements.<\/p>\n
In such a climate, it was clearly impossible for even the most
\nwell-intentioned analyst to make a reasonable risk estimate.
\nCompounding these problems was a lack of prudence and discipline
\nby bank regulators in reporting some of the most flagrant
\nviolations of our banking laws.<\/p>\n
For example, I recently learned that one of the banks the
\ngovernment was forced to take over had lent close to 80 percent
\nof its portfolio to affiliated companies in the same business
\ngroup -- a clear violation of our banking laws which place a
\nlimit on intra-group lending equal to 20 percent of the owner's
\nequity.<\/p>\n
One obvious result of operating under a dysfunctional
\nfinancial system is that banks fail in their most basic function
\nto serve as efficient intermediaries to effectively channel
\nsavings to their most productive use. When savers, whether
\ndomestic or foreign, have no real means of evaluating risks, it
\nis inevitable that the true cost of capital will be understated
\nwith a consequent overstatement of the returns on investment. As
\na result, scarce funds will be allocated to low-return, high-risk
\nactivities.<\/p>\n
We should also recognize that when neither investors nor
\nlenders expect to bear the full cost of any failure, they lower
\ntheir guard against risky investments. This is the often referred
\nto issue of \"moral hazard\", a situation in which, in the presence
\nof a perceived implicit or explicit guarantee, there is little
\nincentive to avoid risky behavior. It is true that the government
\nnever extended any explicit guarantees against bank or corporate
\nfailures. Yet it is also true that the involvement of well-
\nconnected parties in many of our economic activities generated a
\nfeeling that such investments would not be allowed to fail.<\/p>\n
Our foreign exchange regime also encouraged risky behavior.
\nUntil August of last year, Indonesia maintained a \"crawling band\"
\nexchange rate system. The system held exchange rate movements
\nwithin a relatively narrow range.<\/p>\n
Although Bank Indonesia began to widen the band, hoping to
\njolt borrowers to recognize that they needed to hedge exchange
\nrate risks, the band was widened in small steps that clearly
\nfailed to send the intended message.<\/p>\n
Because of our success in containing inflation and in holding
\nour exchange rate relatively constant in real terms, borrowers
\nperceived that the expected loss from any likely currency
\ndepreciation was less than the cost of currency hedging.<\/p>\n
And for many years this assumption proved to be correct. But
\nthe incorrect pricing of foreign capital created vulnerability
\nfor firms with substantial foreign exchange exposure. When we
\nwere forced to abandon our managed float system, the rupiah's
\ndepreciation created unmanageable debt burdens that effectively
\nbankrupted a substantial portion of our corporations.<\/p>\n
Dr. Bambang Subianto is minister of finance.<\/p>", "url": "https:\/\/jawawa.id\/newsitem\/no-easy-way-out-of-ris-crisis-1447893297", "image": "" }, "sponsor": "Okusi Associates", "sponsor_url": "https:\/\/okusiassociates.com" }