IMF-Plus: Crisis management

IMF-Plus: Crisis management

By C.J. de Koning

This is the first of two articles on the Indonesian financial
crisis.

JAKARTA (JP): In one of Asia's main languages the word crisis
has two core elements: It constitutes a "threat", but also an
"opportunity".

The current Indonesian financial crisis has of course
threatening elements like a weak rupiah, lower production, lower
exports, higher inflation and higher unemployment levels. Many
articles have been written about the threats. Less emphasis has
been given to the opportunities which are created by the crisis.

Before opportunities can be managed, one has to agree as to
the causes of the financial crisis in Indonesia:

* It is important to state what the crisis was not. It was not a
crisis of domestic government spending or excessive government
consumption, it was not a domestic inflation crisis, either on
the domestic wage front or caused by domestic price developments.

It also was not due to a lack of international
competitiveness, which would have made Indonesian exports grow
slowly or decline. It was not even a local banking crisis,
notwithstanding that some banks were clearly undercapitalized and
not always prudently managed. It became a local banking crisis in
the later stages of the crisis.

It was also not even a crisis caused by inefficiencies in the
Indonesian economy, notwithstanding that greater efficiency is
always desirable. Finally it was not even a rupiah crisis, which
would have been caused by excessive local rupiah money supply
growth, or other domestic factors.

* It was and is a crisis in foreign currency liquidity. It is a
crisis with many international dimensions, as such coming from
outside the legal borders of Indonesia. It is a crisis of
international interaction with domestic players, rather than a
purely domestic crisis. It is a crisis in a currency of another
country rather than the rupiah.

It is a crisis of short-term capital flows, which got severely
disrupted in the last six to eight months. The crisis erupted
because of changes in risk perceptions by the parties involved.

Firstly Indonesian corporations started to change their risk
perception on the rupiah-U.S. dollar rate once the Thai crisis
erupted. More corporations started to cover their open currency
positions thereby putting pressure on the rupiah.

Secondly foreign bankers started to change their risk
perception on Indonesian borrowers. After July 1997 they became
more reluctant to lend new money or to roll-over existing debt.
After the closure of the 16 banks on Nov. 1, 1997, short-term
credits to the local banking sector became very severely
restricted, as many foreign banks canceled their bank lines to
all but the strongest banks.

Thirdly foreign banks and local corporations had built up an
average maturity of the foreign currency loan portfolio of about
1.5 years. Such maturity is extremely short and is out of line
with corporate cash flows as well as out of line with the
country's ability to accommodate such debt servicing
requirements.

The real conclusion of this crisis description is that it is
not a domestic, but an international crisis in Indonesia. It is a
U.S. dollar liquidity crisis, not a crisis of the currency of
Indonesia, but that of a freely convertible currency from a
different country.

It is an international banking community risk perception
crisis, whereby less foreign currency funds were made available,
causing substantial U.S. dollar demands in Indonesia, and finally
it was an Indonesian corporate sector liquidity crisis whereby 80
percent of its borrowings were in foreign currency, with much too
short an average maturity, causing severe liquidity strains.

Another important point is that rational individual decisions
by Indonesian corporations to hedge their rupiah-U.S. dollar
risk, and by foreign banks to accept short maturities on loans,
and foreign banks on foreign currency loans to Indonesian banks,
do not add up collectively to a picture whereby Indonesia's
ability to pay in foreign currency matches its obligations to
pay. No country cash-flow projection in foreign currency was ever
made. The data to do so was not available at a central level.

If changes in foreign currency cash flows caused the financial
crisis in Indonesia, who are the parties involved?

There are many foreign and local institutions involved in the
transfer of foreign currency to a country like Indonesia. For
instance to start with the one which operates in times of crisis:
the IMF. The IMF, together with a number of foreign governments,
provides standby and other credit facilities to countries.

In Indonesia's case the latest package consists of about US$43
billion. Such crisis lending comes with conditions attached. The
IMF, just like any other financial institution, expects to be
repaid in a relatively short period of time.

Other capital providers are the World Bank, Asian Development
Bank and Islamic Development Bank. Their foreign currency capital
in and outflows are usually linked to segments of an economy to
which private banks do not cater, like education, health care and
bank restructuring.

Just like the IMF they lend to governments and they also
expect to be repaid -- mostly over longer periods. The
International Finance Corporation -- the private sector of the
World Bank -- lends to private sector companies in Indonesia.

Another group is export credit agencies (ECA's). ECA's
sometimes lend directly as some Exim banks do, otherwise they
guarantee (part of) the risks of private banks lending in foreign
currency to a country. Their exposure is mostly to governments,
sometimes banks (rarely possible in Indonesia) and sometimes to
private sector companies.

A main group of foreign currency lenders is the foreign
banking community especially the commercial banks. They lend to
both the Indonesian government, Indonesian banks and to the
corporate sector (state-owned, foreign-owned, joint venture and
fully Indonesian owned companies). Furthermore investment banks
arrange for all kinds of capital market issues whereby the
ultimate investor may be banks, but could be fund managers,
foreign pension funds, insurance companies and individuals.

Still another group is constituted by fund managers and
individuals who like to invest or disinvest in the Jakarta Stock
Exchange, or in any capital market paper that may be issued.

Another group of investors are the foreign companies that
invest in Indonesia or disinvest in it.

Last but not least individuals may also place their savings in
Indonesia or abroad.

So far the lender side. On the borrower side there is the
Indonesian government, state-owned corporations, Indonesian
banks, Indonesian owned companies, foreign-domestic joint
ventures and wholly owned foreign companies. In the international
lending-borrowing relationship to Indonesia, Indonesian
individuals do not play a significant role.

The writer is country manager Indonesia for ABN AMRO Bank.