IMF-Plus: Crisis management (2)
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.