Addressing export woes

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.