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.