Indonesia Inc.: Dream or reality?
By C.J. de Koning
This is the second of two articles on the capricious value of the Indonesia's currency.
JAKARTA (JP): Last year before the crisis started in July the Indonesian government maintained a balanced rupiah budget, which it still does. The Indonesian government did not borrow at all on the rupiah market to complement its tax income.
In other words the government did in no way contribute to an excessive consumption pattern. It behaved extremely prudently. Local price developments also did not show substantial strains in the system.
First half year inflation was running at some 6.5 percent per annum, in line with longer term inflation trends. Also wages did not rise explosively. There was no significant wage pressure on prices.
In Indonesia for most companies wages account for less than 25 percent of total costs. On the export side, Indonesian goods continued to be sold overseas. There was no clear indication that goods had become too expensive, especially since Bank Indonesia allowed the rupiah to depreciate with some 5 percent per annum towards the U.S. dollar.
The World Bank's conclusion was that in principle the economic fundamentals were sound -- of course there were inefficiencies in the system which could be improved. I fully endorse this view looking from the rupiah side.
What happened at the U.S. dollar side however? As indicated, Indonesia's outstanding loans are for around 80 percent in foreign currency. Its savings also, but most of such savings are not kept with institutions in Indonesia.
During the last 8 months exports grew steadily, with the anecdotal evidence of the last few weeks that exports are also stagnating and declining due to lack of raw materials and other production inputs as well as lack of U.S. dollar working capital and the total lack of L/C facilities.
On the U.S. dollar loan side three things happened. Firstly -- as a consequence of the crisis in Thailand -- some companies in Indonesia started to cover part of their open currency positions, in view of the increased uncertainty about the expected depreciation level of the rupiah. This put already a strain on the rupiah - dollar exchange rate.
The second factor was the maturity profile of the external debt, especially the corporate sector debt. There was and up till today still is, no collective management of Indonesia's foreign currency debt.
My estimate was that the average maturity of the corporate sector debt was 1.5 years, with a tendency to become shorter as all foreign currency loans become due and payable when a debt freeze is announced per company.
This is exercised through the cross -- default clause. One should not under estimate the size of this situation. All corporate debt of Indonesia is some US$ 84 billion currently.
A 1.5 year average maturity leads to some US$ 59 billion in foreign currency debt service obligations, more than the total exports of Indonesia expected for 1998 (US$ 58 billion). Again the attempt by companies to honor their commitments put an extreme strain on the rupiah -- dollar exchange rate.
The third factor was the decreased tendency by foreign banks to roll-over their foreign currency loans, and to extend new loans. During the second half of last year BIS figures - when published - will show that in the second half of 1997 and the first six weeks of 1998 the volume of outstanding foreign currency loans declined sharply.
If the current financial crisis is caused by the U.S. dollar side of the rupiah dollar equation, then the solutions also need to be found on the U.S. dollar side.
For instance a Currency Board System would currently be inadvisable for its focus is on the rupiah side of the equation and does not solve the U.S. dollar liquidity crisis that Indonesia is currently facing. Perhaps in some years a Currency Board System could work if the loan currency of Indonesian companies would be in majority in rupiah rather than in U.S. dollars.
How can the current U.S. dollar liquidity crisis be solved ?
A number of efforts have been made already from the foreign side:
* IMF has agreed to a package of US$ 43 billion with the assistance of a number of foreign governments. One observation may be made that so far the channeling of such funds to the Indonesian corporate sector has not taken place. It is in the corporate sector where the foreign currency liquidity is really needed in order to kick-start the economy.
* Dr. Goh Chok Tong, prime minister of Singapore launched the initiative to help Indonesian corporates with pre-export and post-import finance via an Indonesian Trade Finance Guarantee Facility. On Feb. 3, 1998 he suggested such a Facility to President Soeharto. Van Mierlo, deputy prime minister of the Netherlands also supported the facility in his discussions with Soeharto on Feb. 12, 1998. Other governments are considering participating in the Facility.
* One of the key issues for foreign currency liquidity management is to see to it, that the obligations to pay do not exceed the ability to pay. The latter derives from the net export earnings capacity, the earlier from the foreign debt volume and its maturity profile. A foreign currency debt restructuring effort is underway, but may take some months before being finalized. In this connection I suggested earlier to set up an Indonesian Credit Clearing Corporation as an instrument for better foreign currency liquidity management.
But more can be done, also from the Indonesian side. For instance:
* Measures to re-attract Indonesian foreign currency savings back to Indonesia. It is not difficult to give a tax amnesty to Indonesians who have saved overseas -- just like India has done with great success recently. One could establish Offshore Banking Units of banks based in Indonesia.
Such OBU's will be units of banks which fulfill the new capital requirements of Rp 1, 2 and 3 trillion in the period as decided by Bank Indonesia. Such OBU's will be in Indonesia and supervised by Bank Indonesia.
If such OBU's get the right to attract foreign currency liquidity, with a waiver for withholding taxes, if for instance funds are committed for a one year period or more than it is likely that substantial foreign currency funds from Indonesians and other nationalities can be attracted. Also - just like in offshore centers -- income tax could be waived, over such funds placed in OBU's
* A second initiative could be by launching an "I love Indonesia" campaign, whereby Indonesian savers overseas can inform their private bankers overseas that they pledge say 20 percent of their private wealth to help Indonesia, for a period of say two years. Such banks would inform their Central Bank of the amounts pledged, and these Central Banks would inform IMF on a no-name basis.
Those pledged funds could then be used as collateral for the cross-border guarantees needed in the Indonesian Trade Finance Guarantee Facility. Hopefully many patriotic Indonesians of all ranks and file will want to participate in such scheme. This can be arranged on an anonymous basis.
* A third foreign currency liquidity raising measure is to use the asset values embedded in state-owned corporations. It will not be difficult to arrange a substantial size "product loan" on future deliveries of say oil and gas to prospective buying countries. A long term sales agreement on such future deliveries could easily raise many billions of U.S. dollars.
* Last but not least, many foreigners would like the right to lease Indonesian land or buildings for a period of say 99 years. If Indonesia arranges this and protects foreign lease holders from local administrative hassles, then a substantial foreign currency liquidity flow could be started.
A combination of these foreign and domestic actions would show the market that Indonesia is clearly addressing the 80 percent factor and that -- once exports and imports start flowing again - the likelihood of reaching Rp 5,000 per U.S. dollar is clearly within reach.
The anticipation of the markets -- as always -- will do the rest. Let the market do the price fixing for the rupiah but let the market also know that foreign currency liquidity management is now on top of the economic management agenda of Indonesia Inc.
Drs. C.J. de Koning is Country Manager Indonesia for ABN-AMRO Bank.