Dollar liquidity crisis
Please allow me to take the liberty to comment on A way out of the liquidity crisis by Mr. C.J. de Koning which appeared in The Jakarta Post on Aug. 24 and Aug. 25. In the article the author reduces the current crisis to a simple problem of U.S. dollar liquidity.
It is almost tempting to agree with that conclusion, however if one digs deeper it becomes plain that U.S. dollar liquidity problems existed for many years before the crisis and so the recent liquidity problems are not an isolated event sparked by the sudden massive outflow of funds which followed the de facto devaluation of the Thai baht on July 2, 1998, after a sustained attacks on it and other regional currencies by speculators.
The U.S dollar liquidity "crisis", or external imbalance, has existed for decades and has been sustained by even larger inflows of funds and short term and long term public and private sector external borrowing. The external imbalance was therefore of a chronic and systematic nature.
The World Bank has praised this model of growth fueled by ever increasing external borrowing and christened it the Asian miracle, while apparently completely forgetting its own criteria which mark a threshold beyond which countries are classed as being dangerously indebted. These include:
1. Total foreign external debt to GNP ratio of 50 percent.
2. Total foreign debt to export ratio of 275 percent.
3. Debt service to export ratio of 30 percent.
4. Scheduled interest payment to export ratio of 20 percent.
The rupiah crisis had been building up for quite some time. The country's budget deficit was financed with ever increasing external borrowing and the domestic monetary base was expanded by over 20 percent. Inflation was kept under control through the use of subsidies and this and other administrative measures used to cap prices served to discourage local production and led to a very heavy dependence on imports.
The example cited by Mr. C.J. de Koning on Aug. 25 lacks credibility because often companies do not borrow money just to finance exports and not all companies take out loans of exactly the right size. They now face the aggregate of all external loans.
A solution can be culled from past crises which have hit other countries, including those in Latin America. Any solution should include debt relief, debt rescheduling, debt buyback, debt equity swaps, debt exchange and repackaged debt backed up with improved macroeconomic management and structural adjustment. Last but not least shattered domestic confidence needs to be restored. Otherwise Indonesia will be just like a small boat sailing off into the rough international waters of the global era.
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