Private sector debts and offshore deposits

By Joe L. Spartz

JAKARTA (JP): So far, neither IMF intervention nor the economic reform package announced by the government have been able to stem or to reverse the increasingly catastrophic fall of the rupiah.

With the exchange rate now past the 12,000 mark, it is only a matter of time until the importation of finished products, vital raw materials and other essential commodities can no longer be financed or otherwise justified from a business standpoint.

While any defaulting on private sector offshore bank loans involving nonessential ventures or speculative projects such as real estate would not materially affect short-term business activities, immediate debt-relief for essential trading and manufacturing activities is a must in order to avoid massive layoffs and widespread bankruptcies.

The extent of private sector foreign debts, which in addition to bank loans also include trade and other payables, is anybody's guess but US$100 billion does not seem to be a farfetched figure.

While both disbursement and utilization of the IMF bailout package still remain to be finalized, a bail out of the private sector is definitely not on the cards.

The "Love Rupiah" campaign is not going to solve the problem either and in order to provide money markets with a sufficient dollar supply at affordable rates, new initiatives will definitely be required.

In the wake of the Mexican financial crisis not so long ago, it was discovered that private Mexican offshore deposits exceeded the entire national debt.

So it can be safely assumed that offshore funds held by Indonesian depositors are very substantial and in all probability exceed the $43 billion committed by the IMF.

If repatriated and reinjected into local money markets, the rupiah would be bound to appreciate immediately and the currency crisis would be resolved virtually overnight.

No "Love Rupiah" or any other campaign for that matter would be sufficient to bring those dollars back, and in order to do so, very significant incentives would be required.

One alternative would be to grant a total tax amnesty on all funds repatriated and exchanged at the official rate.

Alternatively, repatriated funds could be converted into government bonds with attractive interest rates and redeemable after a certain period at a fixed or guaranteed foreign exchange rate.

The time-tested law of offer and demand still applies and a massive inflow of foreign currency would not only considerably strengthen the rupiah but also provide the private sector with sorely needed dollars at affordable exchange rates with which to meet their most pressing financial obligations.

In addition, serious thought ought to be given to not only authorizing but also actively promoting the possibility of exchanging foreign debt against equity in domestic companies.

Time is running out fast and even financially sound companies are now reaching the point where dollar purchases at the prevailing market rates are outright prohibitive.