Mar'ie's stance on credit

Mar'ie's stance on credit

The Minister of Research and Technology, B.J. Habibie, makes a lot of sense in his argument about the crucial importance of export credits for pushing the sales of such high-tech and big- ticket products as aircraft. He was referring to the blunt reality of the international marketplace when he contended on Monday that nobody would pay cash for such high-tech products as aircraft and ships.

But that is why none of the developing countries with per capita income of less than US$5,000 has ventured into the production of commercial planes in the first place. Low and even middle-income countries, let alone Indonesia with a per capita income of less than $700, simply do not have adequate financial resources, the basic infrastructure, nor a sufficient base of vendors, or parts suppliers, to back such high-tech industries as aircraft manufacture.

In fact, that is precisely one of the basic points of view we raised on this column on Nov. 10 in coincidence with the launching of the prototype of the N-250 plane at the state IPTN aerospace company in Bandung.

Therefore, Minister of Finance Mar'ie Muhammad's outright, blunt argument against such a credit facility is quite legitimate. As Mar'ie frankly and sensibly admitted at a House of Representatives' hearing on Tuesday, Indonesia, with its current economic condition, cannot afford to support the provision of such a financing facility for buyers overseas.

We find it hard indeed to comprehend how the Indonesian government, which is already one of the biggest sovereign borrowers in the world, could provide export credits to foreign buyers. To our knowledge, export credits have so far been given only by financial institutions in the industrialized countries to importers or buyers from the developing countries. Even those credits are granted mostly by government-supported agencies and are protected by official insurance coverage.

What Habibie has proposed for the high-tech industries, such as the IPTN aerospace company and the PAL shipbuilder under his supervision, is quite different from the export credit facility provided at concessional rates by the central bank (Bank Indonesia) during the 1970s and 1980s. The export credits were extended in rupiah for export trade financing and for the production of goods for exports. Their maturity was very short, only one year at the longest. But even this facility was terminated in 1990 due to extensive abuse and because credit from the central bank creates money, thereby causing inflationary pressures.

The main difference is that export credits for the buyers of aircraft from IPTN, for example, will have to be provided partly in foreign exchange because the aerospace company still depends largely on imported materials and components. Moreover, the maturity of such a facility usually ranges from three to five years.

The provision of export credits is not a simple process either. Because IPTN is still a small player, even in the Asian aircraft market, the creditworthiness of the potential buyers of its aircraft requires thorough assessment. Then export credits have to be insured and the premiums have to be calculated according to the credit standing of the buyers. The interest rates should be made competitive. Export credit agencies, or state-owned export-import banks in the developed countries, for example, offer annual interest rates of between six to eight percent. Where could Bank Indonesia raise such cheap funds? Even its certificates of deposits offer interest rates of as high as 13 percent a year.

The required amount of credits also will pose a formidable challenge. Take, for example, IPTN's N-250 aircraft, which is scheduled to be launched next year with a price tag of US$13.5 million per unit. Since Habibie has estimated that at least 260 units have to be sold to reach the break-even point, that means the central bank would have to provide $3.5 billion in export credits to a single company.

But in so far as IPTN is concerned, the availability of an export credit facility actually is only one of the key ingredients essential for pushing the sales of its aircraft. The establishment of a reliable after-sales organization is equally crucial and so is production efficiency. Unfortunately on these two points, IPTN, despite its impressive achievements over the past 19 years, needs to work harder to improve its international reputation. The problem is that IPTN has advanced so much faster than the other sectors of the economy that it virtually operates as an island without the support of local vendors or parts suppliers, which in foreign countries are the strategic partners of aerospace companies.

Given the complex process of assessing and providing export credits and the capability and the current condition of Indonesia's economy, Mar'ie's blunt, outright rejection of the proposal for export credits to foreign buyers is a very wise decision. In fact, that decision will further strengthen the public's confidence in the government's fiscal and monetary management. An ambiguous response to such an ill-timed idea might provide the wrong signal and cause unnecessary jitters among domestic and foreign investors and our creditors overseas.