Private sector debts and offshore deposits

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.