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.