Addressing export woes

The latest foreign trade figures announced by the Central Bureau of Statistics earlier this week confirmed not only the extent of the damage the financial meltdown has wreaked on the economy but also the numerous hurdles to exports which businesspeople have long complained about.

The 70-80 percent fall in the rupiah's value against the American dollar since January should have theoretically made Indonesian goods much more price competitive in the international market. The much cheaper rupiah should have greatly helped the country to export itself out of the current crisis, but this has not happened. During the first nine months of this year, exports of non-oil commodities rose by a mere 1.5 percent.

The positive impact of the steep rupiah depreciation has been nullified by numerous hurdles affecting the export industry. The string of riots in various provinces have discouraged overseas importers from making purchases from Indonesia. The punitively high lending rates virtually closed the only source of working capital for factories. Most overseas banks have shunned letters of credits (L/Cs) issued by Indonesian banks due to the huge amount of corporate foreign debt overhang and the battered condition of the banking industry.

The fact that imports have fallen by more than 40 percent means that there are not enough empty containers available to ship exports. This has raised costs for exporters as freight rates have risen as shipping companies charge for the delivery of empty containers.

The most devastating factor, however, is the virtual absence of trade financing, which has forced many companies to either close their plants or operate far below designed capacities. The main problem is that most of the country's manufacturing plants that are oriented to the export market depend largely on imported materials, parts and components. The falling rupiah is increasing their needs for working capital loans at a time when most banks, beleaguered by huge piles of bad credits, are focusing on loan recovery rather than lending.

Many businesspeople expected that the US$5.6 billion pledged a few months ago by foreign financing institutions to guarantee local L/Cs would help bolster exports by enabling local banks to open L/Cs for the import of basic materials and components.

Banks, however, remain reluctant to open L/Cs for fear of adding to their huge pile of bad loans. According to the Ministry of Trade and Industry, only some $620 million of the $5.6 billion trade-financing package assembled by the government and foreign institutions has been used by local banks. Only a small percentage of the $620 million went to exporting companies. Nearly $485 million was tapped by the National Logistics Agency for importing basic food commodities and by Pertamina for fuel imports.

A very important element seems to be missing from the foreign trade financing package -- working capital loans for financing production operations and export insurance, which has become more essential in view of the increasing security risks in Indonesia.

Realizing the weaknesses of a piecemeal approach, the government announced last week an integrated program for export development that is embodied in a new export trade financing agency currently undergoing final preparations.

This agency is designed to provide not only export credit facilities and working capital loans with a subsidized interest rate for exporters, but also provides guarantees for short-term export trade financing. On top of this, the agency also will extend export insurance and operate as an export information and data center.

In most other countries the role of such a financing agency is conducted by an export and import bank, but since the state Bank Ekspor Impor Indonesia is being merged with three other state banks into a single entity, called Bank Mandiri, the government was forced to establish a completely new agency. This process should proceed quickly because the new agency is being formed from one of the major private banks that were nationalized in August. Most importantly, the export financing agency, though owned by the government, should be run by highly qualified professionals rather than bureaucrats.