Lack of secure trade financing still a hindrance

JAKARTA (JP): Most export-oriented companies in the country still cannot open letters of credit (L/Cs) at the appointed local banks despite the government's guarantees, a footwear industry executive has said.

The Chairman of the Indonesian Footwear Association, Anton J. Supit, said on Friday the 21 appointed banks were reluctant to issue the L/Cs because they were burdened by myriad unresolved banking problems.

"Right now, the banks only provide trade financing to exporters which belong to their own business groups," Anton told The Jakarta Post.

The banks, which are facing liquidity problems and mounting bad debts, are having to operate more conservatively than ever before to avoid risky dealings.

"The appointed banks do not want to take risks. Although the government guarantees our letters of credits, they are still reluctant because it may create more problems for them," he said.

Last July, the central bank appointed 21 local banks to provide guaranteed trade financing to help certain Indonesian export companies import their raw materials.

Plunging confidence in the country's troubled banking sector prompted international banks to reject local L/Cs.

Bank Indonesia has intervened in the past several months by opening about US$5.7 billion worth of trade financing, including L/C guarantees and pre-export financing facilities, including facilities obtained from donor countries.

However, a recent government report says that only $618 million of the amount had been utilized by the end of October.

Most of it was used to finance the imports of food commodities for the State Logistics Agency and crude oil for the state-owned oil company, Pertamina.

Anton criticized the fact that only 21 banks were given the authority to provide guaranteed trade financing to the country's exporters.

"If the government wants to revive the real sector, then it should not be just limited to the 21 banks, because many firms which are not customers of these banks have no way of securing trade financing," he said.

Many companies now had to live off of their cash flow, because they had to conduct business in cash, he said.

Without the government's guarantee, most importers are required to deposit 100 percent security in local banks before they are issued a letter of credit.

Anton said the foreign buyers were worried that the problems could escalate and disrupt production.

"Our image as producers will continue to erode if the trade financing problems are not resolved," he said.

The trade financing problems had contributed to the sharp decline in the export orders of shoes this year from last year's US$1.9 billion, he said.

"This year we will be lucky if we can get 75 percent of last year's amount," he said, adding that the sales slump was also intensified by fears of political instability in the country.

Anton urged the government to create a new financial body outside of banking system which could support the exporters without being restricted by the existing banking regulations.

He said the proposal had been brought to the attention of the central bank, but it had not received any response.

"The government has not delved into the matter. It cannot just tell us to take aspirin for our headaches, rather it must give us the way to buy the aspirin," he said. (das)