Japan's assistance to restore trust in LCs sought

Japan's assistance to restore trust in LCs sought

JAKARTA (JP): President Soeharto asked a senior Japanese
official yesterday to help restore trust in Indonesian letters of
credit (LC).

Minister/State Secretary Moerdiono said the rejection of
Indonesian LCs by foreign banks, including those in Japan, dealt
a big blow to exporters.

"There's been an obstacle in importing raw material for export
products recently because banks abroad refuse to accept LCs from
Indonesia," said Moerdiono after accompanying the President in
meeting with Masahiko Koumura, Japan's deputy foreign minister
and special envoy of Prime Minister Ryutaro Hashimoto.

Moerdiono said the President expected Japan to help solve the
problem.

Japan is Indonesia's largest trading partner and also its
biggest creditor.

Bankers and businesspeople have said many foreign banks have
refused to accept LCs issued by Indonesian banks due to the
worsening of their financial performances in the last several
months.

Yesterday, the rupiah plunged further to Rp 11,800/12,300 to
the U.S. dollar at the close after touching down near 14,000 in
the morning.

The rupiah's sharp depreciation has caused a severe problem
for Indonesian banks not only due to the increase in their
foreign debt but also due to the high interest rates imposed by
the central bank to shore up the battered rupiah.

"The closing down of 16 private national banks in November has
also lowered foreign banks' confidence in our banks," said an
international banking official at a foreign-exchange bank in
Jakarta.

Of the 16 liquidated banks, five had foreign-exchange
licenses: Bank Pacific, Bank Harapan Sentosa, Bank SBU, Bank Guna
and Bank Andromeda.

He said Bank Pacific's foreign correspondents had faith in the
bank because it was 50 percent owned by Bank Indonesia, the
central bank.

He said more reports about the country's troubled banking
industry had further deteriorated confidence.

The bank official said LCs drawn on local banks were denied by
their foreign counterparts, unless they were guaranteed by
foreign banks.

"This has caused a reconfirming cost of between 1 percent and
2 percent of the LC value," he said, adding that if the rupiah
continued to fall to lower levels, the reconfirming cost would
increase. "This is a big blow to our importers."

Another jolt to importers was they had to pay a 100 percent
deposit margin to open an LC in Jakarta. With the already scarce
amount of dollars in the economy, it would be difficult to
provide such a large amount of dollars up front, analysts said.

Anton J. Supit, chairman of the Indonesian Footwear
Federation, acknowledged the difficulty. He said most foreign
banks would no longer accept usance LCs from Indonesian
importers.

"They would only accept a sight LC," he was quoted by the
daily Bisnis Indonesia as saying.

During the precrisis period, Indonesian importers normally
opened a usance LC, which did not require such a large amount of
cash up front.

With such obstacles in opening an LC, Anton doubted whether
the government's non-oil and gas export target of US$49.25
billion in the draft 1998/1999 state budget could be attained.

Indonesian exporters manufacturing products with 50 percent
imported raw materials would be in a real mess, analysts said.

Indonesia's export of plywood to South Korea is expected to
fall to its lowest level in coming months due to the rejection of
South Korean LCs by Indonesian banks, said Wissubagio, marketing
director of giant timber firm PT ITCI Hutani Manunggal.

He said many Indonesian banks worried that South Korean banks
might be liquidated as the country's economy was also facing a
crisis.

He said about 300,000 cubic meters of plywood remained
untouched in South Korean ports due to the rejection of their
LCs.

"It's a serious problem because it will kill Indonesian
plywood exports to South Korea, which has been the third major
buyer of Indonesian plywood in the past few years," he said.
(08/gis)