Companies offer way out of monetary crisis

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.