Business tremors may make L/C guarantee futile

Business tremors may make L/C guarantee futile

JAKARTA (JP): Drained confidence in the domestic economy and
business sector may undermine the workability of the billion-
dollar letter of credit guarantee available from the country's
major trading partners, importers said yesterday.

Chairman of the Indonesian Importers Association (GINSI),
Amirudin Saud, said local banks were demanding that importers
provide 100 percent cash up-front as a security deposit to open a
L/C because of the teetering economy.

"This is difficult to fulfill because of the tight liquidity
environment," he told The Jakarta Post.

In tandem with the country's monetary crisis which started in
July last year, overseas banks have rejected local L/Cs due to
depleted confidence in the ailing domestic bank sector.

The problem has crippled the country's production system,
which needs up to 50 percent of imported materials, including the
export industry.

Indonesia's major donor countries have agreed to provide
multibillion credit facilities to guarantee the country's imports
following the International Monetary Fund's (IMF) agreement to
disburse the second tranche of its pledged bailout loan.

Amirudin said L/Cs issued by Indonesian banks would face no
more rejections because they would be covered by the credit
insurance.

Several importers, however, said there was another obstacle to
the workability of the L/C guarantee.

"This time, the difficulty comes from local banks, not
overseas banks," a businessman said.

Local banks required importers to put 100 percent cash up-
front to open their L/C, he said, adding that the deposit
security was needed because banks doubted the viability of local
corporates due to the economic crisis.

Describing the "current high interest environment", he said
that putting a 100 percent security deposit to guarantee the L/C
would be extremely expensive.

"If we have such a large fund, we may prefer to place it in
the deposit, which now offers very attractive rates."

He said banks could be reluctant to provide credit for the up-
front cash because they preferred to put their cash in less risky
Bank Indonesia promissory notes.

BI raised the interest rates of its short-term promissory
notes (SBIs) on Thursday, boosting the rate of the one-month SBIs
to 58 percent from 50 percent.

Uncertainty in the domestic economy has resurfaced following
this week's student demonstrations demanding political reform
which descended into riots in Medan, North Sumatra.

The rupiah fell back to as low as Rp 10,000 to the U.S. dollar
after it managed to rise to about Rp 8,000 following the
government's expressed commitment to follow the IMF-sponsored
economic reform programs, and a rise in BI's benchmark interest
rates last month.

Amirudin said that the increasing volatility of the rupiah had
also raised the cost of opening a L/C as the up-front dollar
deposit would be based on a high exchange rate.

He also said that even though the overseas credit financing
had been disbursed, not all local corporates were eligible for
the facilities because foreign banks would only accept L/Cs drawn
up by local companies which had not exploited preferential
government treatment.

"Those which made businesses on government special favors will
be rejected by the foreign banks," he said. He cited the
rejection experienced by particular importers even though BI had
put a total of $1 billion in overseas banks to guarantee local
L/Cs. (rei)