Nationalism is a hindrance

Nationalism is a hindrance

By Joe L. Spartz

JAKARTA (JP): In the wake of a free-falling rupiah and
vanishing stock market values, financial gurus and investment
pundits are vying to explain the causes of the financial
disaster.

They are the same people who, not so long ago, were falling
over each other to extol the dynamic virtues of the so-called
tiger economies.

Among the plethora of opinions and advice proffered, very few,
if any, concern themselves with a major contributing factor --
namely economic nationalism.

Whilst economic nationalism may have been justified in the
past in order to shield nascent domestic businesses from foreign
competition, its continued existence has now become increasingly
anachronistic and counterproductive.

By and large, direct foreign investments in national or
unlisted companies are not allowed and, in order to meet their
investment and working capital requirements, a significant number
of companies resorted to short-term and readily available
offshore financing.

Following a controlled and fairly predictable rupiah
depreciation over an extended period, it was not surprising that
offshore financing, more often than not unhedged, became
irresistibly attractive.

A fundamental and self-evident truth however was largely
ignored or forgotten, namely that itinerant funds by their very
nature are not permanent and can vanish with disastrous
consequences virtually overnight.

By mid 1997, when financial markets in Thailand started
collapsing in a dizzying and virtually unstoppable downward
spiral, it was only a question of when and by how much Indonesia
would be affected.

Private sector short-term and largely unhedged offshore loans
had reached record heights at a time when international bankers
and fund managers throughout the region were frantically
scrambling for cover.

Stock market positions were liquidated in a panic-stricken
frenzy and many offshore fund borrowers put on notice that loan
rollovers were no longer an option.

With the ensuing free fall of the rupiah, local fund
requirements for the retirement of offshore bank loans or the
settlement of foreign currency payables more than doubled within
a very short time.

Economic fundamentals all of a sudden no longer mattered with
increasingly unrealistic rupiah exchange rates solely dictated by
psychologically influenced and panic-driven mechanics of offer
and demand.

Since economic nationalism in the past effectively precluded
sufficient capital investments or permanent inflows of offshore
funds, businesses with no foreign partners now have to face the
financial onslaught on their own.

For a large number of companies locked in between foreign
currency payables and rupiah receivables, the coming months will
be no less than a struggle for naked survival.

With rupiah sales proceeds of imported goods often barely
covering foreign currency replacement costs, a yet to be
quantified number of trading companies will inevitably face
bankruptcy or drastic downsizing.

A significant number of pending bankruptcies could have been
avoided if the wholesale trading or department store retailing
sectors had been accessible to foreign investors.

In addition to contributing permanent investment capital,
extended supplier credits or long-term working capital loans,
foreign partners could have been expected to do their utmost to
prevent their joint-ventures from going bankrupt.

Another example of economic nationalism is the real estate
sector whose outstanding borrowings represent a significant
portion of the banks' non-performing loan portfolios.

Existing regulations and foreign ownership limitations still
preclude the acquisition of empty apartments or excess office
space by non-nationals and the adoption of the Singapore model
would most certainly go a long way in easing the current real
estate glut or to reduce the increasingly critical amount of non-
performing bank loans.

Real estate ownership, whether local or foreign, does not
really matter since, after all, related investment are permanent
and here to stay.

Itinerant or peripatetic inflows of temporary offshore funds
are a very dangerous two-edged sword indeed.

Economic nationalism should be replaced by a pragmatic and
ultimately self-serving liberalization of foreign investment
rules and regulations.

In order to attract offshore capital on a permanent and
lasting basis, foreign investments in trading, real estate,
services as well as selected other sectors should not only be
allowed but also actively promoted and encouraged.

With the rupiah setting all-time depth records at 9,150,
offshore funds should be, wherever possible, nailed with their
shoes to the floor to prevent them from walking out again.