A chance for Indonesia
The markets have waited for months to see which way the cat will jump in Indonesia. Opportunities were frittered away and the situation today is now worse that it was two months ago. Still, it is not too late to reverse the country's downward spiral, if the correct policies are adopted immediately. For the first time in months, that now seems possible. Realizing that recovery cannot be erected on a policy of drift, President Soeharto's new government has abandoned the will-o'-the-wisp currency board, and has resumed serious negotiations with the International Monetary Fund. The IMF, for its part, seems to have decided on a more focused approach, which is just as well. All aspects of its previous 50-point reform program remain relevant, but they are not all equally urgent. First, the Fund should resuscitate the patient; then, it can attack the root causes of the disease -- in this case, an obviously sclerotic economic system whose arteries need to be flushed out and cleansed of cronies. But if the sum of things is to be saved, if 200 million people are not to sink like a seven-stone weight into the ocean, emergency procedures should concentrate on what is immediately necessary. It is no secret what these are.
First and foremost, the country's banking system needs to be saved. The crisis is in essence a banking crisis, and growth cannot resume if the banking system is not set straight. Measures to do so should include recapitalizing banks through an infusion of government funds, aid from agencies like the World Bank, and foreign direct investments; the consolidation of neophyte banks into stronger ones, and a strengthening of banking regulations. Symbolic actions such as the IMF ordering the closure of 16 banks to signal resolve, as it did at the outset of the crisis, and acknowledging now that the move was a mistake, will no longer suffice.
Second, massive private foreign debts have to be restructured. As the South Korean experience indicates, the rupiah will not stabilize so long as this problem remains unresolved. The IMF has little leverage over lenders, but it can still facilitate the process of rescheduling loans. Foreign governments must also get involved, as the U.S. government did in resolving South Korea's short-term debts. Since Japanese banks hold a substantial portion of the outstanding loans to Indonesian corporations, the Japanese government ought to take the lead in this instance.
Third, trade financing has to be restored. Letters of credit (L/Cs) issued by Indonesian banks are not being honored because most overseas banks have stopped rupiah transactions. Besides restricting the ability of its exporters to manufacture goods for lack of inputs, the difficulty of obtaining L/Cs has also stymied the import of necessities and has left Indonesia vulnerable to hyper-inflation. The Australian government proposal to provide food aid will help to relieve the attendant human suffering, but will not solve the problem in the long-run. Only the Singapore government's proposal of a scheme to guarantee L/Cs will work. International attention should be re-focused on this idea.
Needless to say, none of the above is possible if the Indonesian government does not get its act together. A few more months of family ueber alles will result in collapse. This is its third chance. It had better grasp it. It is likely to be the last.
-- The Straits Times, Singapore