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)