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.