Euro could benefit Indonesia

Euro could benefit Indonesia

This is the second of two articles based on an excerpt of a
paper presented at the ABN-AMRO Conference on the European Single
Currency on June 17 in Jakarta by J. Soedradjad Djiwandono, a
professor of economics at the University of Indonesia and
Governor of Bank Indonesia.

JAKARTA: The presence of a strong euro will also mark the
beginning of a system of currency blocs, of which I expect there
to be three: the U.S. dollar, the yen and the euro. The euro will
be a major international currency, leading to a greater degree of
symmetry between the major international monetary systems.

This should increase the opportunities for better cooperation.
More speculatively, if the euro and the yen come to have as much
international importance as the dollar, we may see that certain
commodity prices are no longer driven.

This could allow some currencies tied to the dollar to
decouple and attach themselves to one of the other two bloc
currencies. We may ask what effects this segregation of the
world's currencies into blocs would have. I believe that, again,
it may be too early to tell but it may affect currencies in
different ways.

The result of having fewer currencies to manage should make
coordination between policymakers at an international level
easier. In this way, currency crises should become easier to
avoid. Furthermore, the firepower of each of the blocs would be
bigger.

This would make them better able to defend their currencies
from attack. On the other hand, the creation of currency
stability within each bloc might lessen bloc members concern
about currency movements between the blocs.

For many Asian countries, the benefit of currency stability
within each bloc is obvious. Given their traditional dollar-
denominated exports, short-term dollar volatility and its
associated costs to exporters, this would be unwelcome to many
Asian countries. Exports would become more volatile and this
transmission of international volatility into domestic markets
would be detrimental to Asian economic growth.

As far as Indonesia is concerned, it seems to me that there
are compelling opportunities for which we have to position
ourselves, even though, as I have already acknowledged, some
potential problems still need to be addressed.

As I pointed out earlier, the euro will create the second-
largest capital market in the world and both our private and
public sectors should organize optimum access to it.

The magnitude of this new pool of funds will be such that no
investors or borrowers will be in a position to ignore it. Those
investors and issuers that are not already learning will have to
learn how to interpret it.

New market participants will emerge, some being formerly
domestic institutional investors. They will discover a universe
of international issuers, some of whom will be from emerging
countries. Financial institutions will position themselves to
introduce newcomers to the market.

Analysts trained in U.S. markets, where emerging market
issuers are known already, will assist European investors to
assess the respective creditworthiness of these issuers. Ratings
from U.S. or European rating agencies will be used in entering
the new market. With the low interest rates currently prevailing
in Japan, the United States and Europe, investors will be looking
for higher returns from new issuers which offer safety, quality
and higher yields.

Issuers will also, in turn, learn how to understand European
institutional investors, which resources to tap and how to
approach these new sources of funds. European investors must
position themselves among their peer group, while issuers will
also position themselves with these new investors, a phenomenon
that is already occurring.

In a world which is becoming global, both investors and
borrowers are diversifying and looking for new opportunities or
new sources of funds.

From Indonesia's point of view, a window of opportunity is
opening. The euro market meets many of the criteria used by the
Republic of Indonesia in its traditional approach to financial
and capital markets: pragmatism and prudence; borrowing when
markets are favorable and conditions attractive; and tapping the
market when it offers something of specific interest, such as
benchmarking or a true diversification of sources of funds.

When Indonesia approached the Yankee bond market in July 1996,
for example, its first objective was benchmarking. In the future,
if Indonesia were to approach the euro market, it would probably
be to diversify its sources of funds and to present the
Republic's name to a new universe of investors who are unused to
the Indonesian name and risk.

By raising the level of awareness of European institutional
and retail investors in our country, we would be able to pave the
way for other Indonesian borrowers.

Lately, I have been making preliminary approaches for such a
purpose. A couple of months ago, by the invitation of the
Indonesian Embassy in Brussels and Bank Brussel Lambert, I made a
presentation in front of the Belgian banking and financial
communities.

And less than two weeks ago, I met with different banking and
financial industries in several meetings in Paris, organized by
the Caisse des Depots et Consignations Group to start the
campaign.

On the borrowing side, if it borrowed in the new market,
Indonesia could elect to keep some euros to diversify its
currency reserves and to match its liabilities.

Or, alternatively, it could change the euros into dollars,
which is still the natural currency of Indonesia. On the
investment side, the euro market could be equally attractive for
Indonesia, offering a series of diversified borrowers which have
so far not tapped anything but a limited pool of the largest
investors. More opportunities will, therefore, be offered to
Indonesian investors with varying degrees of risk and yield.

The development of a single market with a single currency
should, moreover, lead us to consider further the currency
denomination of our exports to the European market and the
implications for our future asset and liability management. In
addition, the euro might become one of the main reserves
currencies.

The Indonesian banking industry could be among the first
Indonesian users of the euro market. The ability to access a new
market with new products and new participants, on both the asset
and liability side of the industry, will be of considerable
benefit to our banking sector.

Our banking industry can be expected to be approached by its
European counterparts for information and for access to the new
market. Our banks, in turn, will share part of the responsibility
for educating their Indonesian customer base of European
opportunities and assisting them in the conversion process.

Indonesian imports and exports could be denominated in the
euro. The development of European financial transactions for
Indonesia will parallel the development of trade activities. The
longer-term anticipated reduction in exchange rate uncertainty
should foster trade and hopefully foreign direct investments in
Indonesia. One can hope that the creation of this large market
will contribute to more investment in and increased financial
flows to Indonesia.

Another important question for us will be what will happen to
our existing debt denominated in currencies that will be
converted into euros, the rate of interest that will apply and
how the legislation that determines these issues will be
formulated?

For Indonesian borrowers, the conversion into euros of
existing debt facilities in European currencies will have the
major advantage that, instead of dealing with several European
currencies, we will be dealing with one.