IMF-Plus: Crisis management (2)
By C.J. de Koning
This is the second of two articles on the Indonesian financial crisis.
JAKARTA (JP): In the process of lending and borrowing international currencies to Indonesia a few elements should be highlighted:
* Indonesia's foreign currency borrowings have now reached a stage where they account for around 80 percent of total borrowings of the country, excluding the latest IMF package.
* Each foreign currency lender influences the lending quality of all other lenders. This level of interdependence is rarely highlighted as most institutions prefer to show their own independent decision making, rather than be guided by collective decision making. However, Indonesia has only one collective foreign exchange earnings capacity -- its export level of goods and services -- to service all debt-service obligations to all lenders.
* The transparency of the process is low. Indonesian companies do not fully report their foreign currency obligations, neither do all banks, either offshore or onshore. Some state entities do not always fully realize the extent of their foreign currency commitments as in the case of the power purchase agreements which are priced in U.S. dollars with earnings in rupiah, or natural gas purchases from Pertamina to PLN, which are also U.S. dollar based.
* The collective maturity profile of the total foreign currency borrowing portfolio -- including private sector foreign currency borrowing -- has not been regularly assessed in Indonesia or any other developing country as far as I am aware. In other words foreign currency cash-flow obligations are not mapped out, and are not compared to expected foreign currency cash in-flow.
* The risk perception of the lenders is that the Indonesian government constitutes the lowest risk category followed by state-owned banks and private banks followed by private sector borrowers. This risk perception is not necessarily the most efficient manner to allocate foreign currency borrowings, as the perceived least risky lending propositions also generate the least foreign currency earnings. If financial crowding out occurs, it is nearly always at the expense of export and import related companies.
* Positive measures for attracting foreign currency savings like establishing off-shore banking units, allowing 99 year leases on Indonesian land and buildings, actions to utilize Indonesian overseas savings and arranging for "product loans" are not yet taken up in a coordinated fashion.
* The implications of the forward foreign exchange market where some companies have sold off many times their export earnings in a single year, leaves Indonesia more exposed on the foreign exchange market.
To manage this financial crisis as well as future situations requires:
Understanding that this financial crisis in Indonesia is an international crisis, rather than a domestic one. Domestic fiscal or monetary policies provide little support in solving this crisis. Even sorting out the domestic banking crisis, notwithstanding its great long-term benefits, does little to solve the immediate crisis.
Understanding that this financial crisis is a foreign currency liquidity crisis where short-term foreign currency capital flows are now totally disrupted, particularly to the Indonesian corporate sector and to the banks in Indonesia.
Understanding that the speed with which this crisis occurred beat all expectations. The same holds true as to the severity of the crisis. This is due to the fully open currency system Indonesia has practiced and benefited from for 30 years.
Management of the financial system in Indonesia may need to refocus on the international dimensions.
For instance Bank Indonesia may wish to expand its International Division substantially so that it can focus on foreign currency cash flows and advise both foreign banks and all Indonesian borrowers on the foreign currency cash out-flow and in-flow.
This is with the aim to improve the risks associated with doing business with Indonesia. Bank Indonesia may also wish to advise much more extensively on how to attract foreign currency savings to Indonesia.
Foreign governments can help by participating in the Indonesian Trade Finance Guarantee Facility as launched by Dr. Goh Chok Tong, prime minister of Singapore, and already supported by a number of governments. This facility reconnects short-term capital flows to Indonesian exporters and importers and is vital to kick start the economy again.
Finally foreign banks and local Indonesian borrowers can also help. They can jointly set up an Indonesian Credit Clearing Corporation.
* This corporation -- possibly placed within Bank Indonesia -- can keep track of all foreign currency lending and borrowing positions, thereby protecting both lenders and borrowers. This corporation will provide accurate and up-to-date information to all interested parties.
* It can furthermore act as a paying agent, receiving loan interest and principal from all Indonesian foreign currency borrowers and settling it with the foreign lenders.
* The corporation can act as the security and execution agent on behalf of the foreign banks in the case of non-receipt of payments.
* The corporation can also -- in consultation and agreement with the foreign lenders -- be the vehicle that can assist Indonesia in situations where its obligations to pay foreign currency exceed its ability to pay.
Temporary extensions of facilities to Bank Indonesia, rather than to the borrowers, can be accommodated. In this manner micro lending and borrowing decisions can be combined with macro management of the economy via this corporation.
* Last but not least the corporation can play a similar role for the current foreign currency debt restructuring efforts which started up last week.
The writer is country manager Indonesia for ABN AMRO Bank.
Window: Understanding that the speed with which this crisis occurred beat all expectations. The same holds true as to the severity of the crisis. This is due to the fully open currency system Indonesia has practiced and benefited from for 30 years.