Companies offer way out of monetary crisis

By C.J. de Koning

JAKARTA (JP): Indonesian companies until recently were the engine of Indonesia's economic growth. They produced, they exported and imported. They employed millions of Indonesian workers, who then had an income to feed their families and dependents in the countryside. The companies also generated a substantial part of the Indonesian government's tax revenues.

Now the company sector is in trouble. Production is stagnating or declining, building sites are abandoned, workers laid off and the chances for social unrest increasing. Exports and imports in U.S. dollar terms are also declining because of the lack of liquidity available in the local banking system, while liquidity provided by foreign banking sources has virtually dried up.

Questions being asked at this stage are "why did it happen and who is to blame for all this?". Many emotions arise in such a discussion, most of which are unproductive as they relate only to the past and do not help to set out a course for the future.

My view is that the crisis occurred because the capacity of Indonesia to generate foreign currency earnings did not keep pace with the foreign currency debt servicing obligations of the Indonesian corporate sector. The earnings capacity really represents the accumulated export income and import expense of the corporate sector.

The estimated value of Indonesian exports and imports in 1998 is US$58 billion and $42 billion respectively. However, before the debt freeze, the contractual obligations of the Indonesian corporate sector required interest and principal payments of some $59 billion in 1998, from total debts of approximately $84 billion, based on the latest estimates.

In comparing the debt servicing obligations of a country with its earnings capacity, it does not matter whether the companies are state-owned, foreign-domestic joint ventures or private national firms. They all must draw foreign currency for debt- servicing out of the same pool of earnings.

With hindsight the imprudence of holding collective debt servicing obligations which made up such a large proportion of the total external debt is obvious. However, both companies and banks worked under the assumption that foreign currency debts could be rolled over.

Neither was it wise to leave such a large proportion of foreign currency debt unhedged towards the rupiah, especially among companies producing for the local market. Most people assumed that the rupiah would depreciate by only 5 percent per annum against the dollar.

Indonesia's banking sector is valued at $35 billion at the rate of Rp 10,000 to the dollar. How could a sector with this value possibly have provided funds of $137.4 billion to Indonesia's government and companies? The sector would have to grow fivefold before being able to lend funds of this magnitude.

The volume of funds demanded by the local corporate sector would suggest that it had outgrown the local banking sector. Dollars and other foreign currencies were needed to complement local savings. Foreign currencies will continue to be needed for the foreseeable future.

The currency crisis in Indonesia originated in the corporate sector. Demand for U.S. dollars began, gradually at first, then later more spectacularly, to outstrip the supply of dollars generated by net export earnings. Foreign portfolio investors and domestic savers followed and exacerbated the trend.

Looking to the future, we know local liquidity in dollars, and even in rupiah, has become scarce. Interest rates remain extremely high for the small supply of funds still available. Foreign lending has come to a virtual standstill, and debt restructuring efforts have just begun. The latter may take some months before showing results.

Using the same analogy as in an earlier article in The Jakarta Post (Dec. 18, 1997) on the subject: Indonesian planes are grounded, no cash flow is generated and an enormous asset value destruction is taking place. Companies are reducing production, export and imports, increasing prices and laying off workers to adjust to the new situation.

The title of this article claimed that Indonesian companies are the solution to the current crisis, since it is these companies who, in the hands of entrepreneurs, bring resources together and produce, export and import. The entrepreneurs are a group of people that Indonesia should be proud of. They take risks, employ millions of Indonesians and drive the country's economic progress. In my personal view it matters little whether companies are indigenous, non-indigenous, foreign, or even state owned. It is the entrepreneurial skills that matter and the risks such entrepreneurs are willing to take.

Currently entrepreneurial skills are near paralyzed by an undervalued rupiah, very high domestic interest rates (both for U.S. dollars and rupiah) for very limited liquidity, a high level of debt aggravated by unhedged dollar borrowings, and an economy in which vital supplies of raw materials and intermediate goods are diminishing or disappearing. To compound this all, the local distribution network for many goods is also crumbling.

Under these circumstances Indonesian companies need help. They need liquidity again at competitive international rates, rather than at high local rates. The sooner this liquidity can be arranged the better, since it will help to lessen unemployment, calm inflation, strengthen the rupiah and encourage better use of Indonesian assets.

Help can be arranged as follows. Bank Indonesia must designate some 15-20 banks as Trade Finance Banks (TFB's), from among the local and foreign banks operating in Indonesia. These banks will have authority to grant pre-export and post import finance in U.S. dollars, or other convertible currencies, for a period of 90 days.

In view of the current weak position of many Indonesian companies, TFB's will only grant such credits to companies on a last in first out basis. This would require a Ministry of Finance Decree prioritizing TFB claims on companies over all other lenders.

Under Dutch Law this would be called Boedelkrediet and under U.S. Law Chapter 11 Financing. The TFB's will also need funding, which basically has to come from overseas banks, so an additional system of support needs to be arranged.

Foreign banks are, under the current circumstances, reluctant to increase their exposure in Indonesia. However, if Trade Finance Banks shoulder the risk over companies on a last in first out basis, the risk of a Trade Finance Bank failing to honor its obligations can be covered by a Bank Indonesia guarantee. The risk of Bank Indonesia being unable to service its commitments -- highly unlikely, but a theoretical risk -- can in turn be covered by a guarantee from foreign governments.

This trade finance guarantee facility is, in effect, a country risk insurance pool and will cover risks which currently prevent the foreign banking community from granting credits in Indonesia. Foreign banks, with risks guaranteed, will be willing to grant credit to the Trade Finance Banks, and via them, to the Indonesian corporate sector.

Dr. Goh Chok Tong, Singapore's Prime Minister, promised backing for any such scheme implemented in Indonesia in his meeting with President Soeharto last Tuesday.

One of the questions yet to be answered is whether any such initiative should come in the guise of multilateral or bilateral arrangements.

The advantage in a multilateral scheme is that it assists Indonesian entrepreneurs mobilize both local and foreign (or imported) resources for exports and imports.

Bilateral arrangements will help foreign exporters, but will not necessarily provide the liquidity needed, and are not so efficient in distributing raw materials and intermediate goods to the ultimate purchasers. In my view bilateral arrangements can remain, but a multilateral arrangement is better suited to a rapid resolution of the Indonesian crisis.

To monitor the operations of the trade finance guarantee facility, a trade finance clearing agency would also need to be established to provide the country risk cover to foreign banks investing funds and ensure that all parties obey the rules.

If Indonesian exporters are then required to bring back, and exchange to rupiah, the proceeds from exports, the rupiah will strengthen. As encouragement Bank Indonesia could give entrepreneurs the option to repurchase such foreign currency at the same exchange rate, if foreign exchange is needed to produce further exports, within a 90 day period.

The facility needs the support of the Indonesian corporate sector, the Indonesian Trade Finance Banks, Bank Indonesia, the Ministry of Finance, foreign governments, foreign banks, the IMF and the World Bank. For the sake of Indonesia, let us hope that this can be arranged.

Drs C.J. de Koning is Country Manager Indonesia for ABN-AMRO bank.