Crash liquidity injection

Crash liquidity injection

Official announcements last week brought in what the
Indonesian Chamber of Commerce and Industry (Kadin) saw as winds
from heaven to soothe the business community which has been
burning in the "hell" of a liquidity crunch since August. If the
pledges materialize, no less than Rp 40 trillion in new funds
will be injected into the economy within the next few months.
That will represent as much as 12 percent of the total money
supply (broadly defined) as of September.

Bank Indonesia's (central bank) Director Muchlis Rasyid said
Rp 20 trillion in funds from state companies would be disbursed
in loans to small and medium-scale enterprises (SMEs) starting
next month. That amount will be in addition to the Rp 3 trillion
in funds from PT Jamsostek, the state-owned social security
company for private-sector employees, which President Soeharto
had previously ordered to be lent to SMEs and low-cost housing
developers.

The President was quoted by Aburizal Bakrie, Chairman of
Kadin, as saying in Cape Town, South Africa, on Friday that US$5
billion (Rp 17 trillion) in funds derived from Singapore's
standby loan would also be injected through state banks as
credits to medium and big businesses. The battered stock exchange
will also get a shot of boon. Soeharto has ordered state
companies to use up to 1 percent of their net profits to buy
shares on the Jakarta Stock Exchange to reinvigorate the exchange
which has lost 47 percent in market capitalization since July.

No technical details were immediately available on how the
crash liquidity injection would be implemented, but the
government has assured businesspeople that all those funds will
be lent at an annual interest of 17 percent, much lower than the
current market rate of 27 percent to 30 percent.

Further clarification is especially needed for the
disbursement of the Singapore standby loan. Finance Minister
Richard Hu assured the Singapore Parliament last week and the
Monetary Authority of Singapore reiterated yesterday that the
loan would not be used unless the IMF-led $23 billion first-line
defense assistance had already been used up. Another puzzling
question is why the government chose foreign debts to inject
liquidity. In the past, all credit programs which offered below-
market rates were funded by liquidity credits (refinancing
facility) from the central bank. Drawing down on foreign debts at
a time when the rupiah rate is still highly volatile is a
dangerous game.

The government should obviously address the plight of the
business community as the private sector has been the locomotive
to growth since the early 1990s. But notwithstanding the great
relief the new funds would bring to the cash-strapped business
sector, the crash liquidity pumping program is still raising
great concerns. Past experiences show that government-directed
mass lending programs often override prudential requirements. The
execution of programs based on presidential instruction often
ignores economic rationale even though the objective is
commercial interest. Since the credits will be extended through
state banks the risk is quite big that political influence may
weigh more than the commercial viability of the borrowers, as
shown by the high rate of bad credits among state banks.

Prudential lending measures are especially crucial now as the
government is strengthening the financial sector as part of the
painful stabilization program agreed with the International
Monetary Fund. It is therefore most imperative that the lending
of these huge funds be made strictly on viable credit assessment
and fully in a transparent manner and be directed to export and
export-related activities. Finance Minister Mar'ie Muhammad
assured the House of Representatives last week that the
government had no plans to bail out, directly or indirectly,
private companies over foreign debts.

If some of the funds were extended to bail private companies
out of foreign debts, the private sector would never learn from
its mistakes and greed, which are responsible partly for our dire
economic condition now. Further down the line, the concerted,
costly efforts to regain the market confidence in the economy
would suffer a great setback. The stabilization program
consequently would take much longer and the pains would get more
painful. For the umpteenth time, we must make this point: It is
the snail's pace progress in the improvement of bad governance
that has been mainly responsible for the nation's inability to
regain market confidence despite the IMF backup.