Restoration of confidence a top priority

Restoration of confidence a top priority

By Joe L. Spartz

JAKARTA (JP): Like any other currency in the world, the value
of the rupiah is determined by a variety of factors, of which
public trust and confidence are amongst the most important and
elusive.

The importance of public trust and confidence has been
painfully demonstrated in Indonesia, where despite a whopping
US$50 billion in financial assistance pledged by the
international community, foreign debt rescheduling, exorbitant
interest rates on rupiah deposits -- not to mention the plethora
of reform measures announced by the government -- the rupiah has
yet to reach levels permitting a sustained economic recovery.

The recent strengthening of the rupiah at or below the 12,000
mark, however, was mainly due to speculative currency trading and
local illiquidity factors and, as a result, should neither be
construed as an improvement of economic and financial
fundamentals nor as a sign of restored public trust and
confidence.

The business community would generally accept an exchange rate
of Rp 7,500 per U.S. dollar as a threshold, beyond which even
well managed and hitherto sound companies would find it extremely
difficult to recover or even to survive.

An acceptable level of confidence, a conditio sine qua non for
a sustained strengthening of the rupiah and a resulting economic
recovery, has so far failed to materialize and time is running
out fast.

The restoration of public trust and confidence should,
therefore, be given the highest possible priority on the
government's reform agenda and a realistic and self-critical
appraisal of all reform measures initiated to date should be
undertaken without further delay.

The government's reform package lacks clear-cut priorities and
is insufficiently detailed on ways it will try to jump-start the
stalled economy.

In the face of existing realities, reform measures need to be
reassessed not only in accordance with other priorities but more
importantly so with regard to an overriding need for restoring
public trust and confidence within the shortest possible time.

The government's reform program was seriously flawed from the
start by its failure to include major opposition parties in its
preparation.

After all, the financial and economic crisis besetting the
country affects the entire population, irrespective of their
political leanings or affiliations. The participation of
qualified opposition figures would have gone a long way in
providing political, economical, financial and social reforms
with a sorely needed degree of credibility and legitimacy.

This could have been achieved through the creation of an all-
encompassing crisis cabinet or a national reconstruction council,
transecting political party lines and reporting directly to the
president, who in return would be empowered to enact through
agreed-upon emergency measures by presidential decree.

Another key weakness of the government's reform program,
effectively precluding a restoration of public trust and
confidence, is its failure to include concrete measures on how to
follow through on an almost unanimous public condemnation of
corruption, collusion and nepotism (KKN in local acronym).

The government has yet to take action against the worst
offenders and its reform measures have rather ominously failed to
include a clear statement of intent to seek a redress for
economic and financial damages inflicted on the national economy
from those responsible.

As a result, public trust and confidence are still sorely
lacking.

A case in point is the banking sector which -- to the extent
that nepotistic and collusive lending policies contributed to the
collapse of the economy -- has a lot to answer for.

Legal lending limits were almost routinely breached in the
past and yet, only nine small private banks have so far been
subjected to police investigation.

Despite a professed official policy of openness and
transparency, debtors' ledgers of both state and private banks
largely remain shrouded in secrecy and the Indonesian Bank
Reconstructing Agency (IBRA) has yet to disclose any reports of
their audits of ailing banks.

Consequently, the magnitude of nonperforming domestic loans,
existing loan collaterals, credit approval procedures followed
and the relationship between borrowers and banks are the subjects
of rumor and speculative innuendo.

While Bank Indonesia has injected an estimated Rp 135 trillion
to Rp 170 trillion of state funds into the ailing bank sector,
related disclosures, explanations or detailed accounting often
remain scant or insufficient.

Recent bank restructuring measures, which include the closing
down of three private banks, the merger of four state banks and
the nationalization of another four private banks, represent an
important step in the right direction to be, in all likelihood,
followed by additional bank closures, mergers, privatizations or
nationalizations.

The collective damage inflicted by the banking sector on the
national economy, however, still remains to be assessed and
should be followed by clear-cut and strict legislative guidelines
-- not only for assigning responsibility but more importantly to
exact reparation and restitution from those concerned.

In order to restore the necessary credibility to the domestic
banking sector, state as well as private banks, without
exception, should be subjected to in-depth audits with the
resulting reports made public.

Delinquent bank owners, as well as bank executives, should be
held personally responsible, including through legal recourse
against their personal assets, whether located in Indonesia or
"parked" abroad.

On the international front, Indonesia's battered image and low
credibility is not improved by frequently unbalanced or outright
negative and hostile media coverage.

Serious consideration should therefore be given to the
enlistment of professional and properly qualified outside public
relations services.

Alternatively, an expedient and low-cost approach would be the
placement of full-page advertising editorials in leading
international print media, drafted and signed by internationally
renowned business leaders or high profile economic and financial
experts.

In order to convey a properly balanced and credible picture,
editorials should not only highlight positive points and existing
opportunities but also openly, honestly and self-critically
discuss Indonesia's problems and shortcomings.

Another major credibility hurdle is the question whether the
legislative, executive and judiciary bodies, not to mention the
well-entrenched bureaucracy, are able in coping with the
avalanche of reform measures.

The shear magnitude of even the most pressing reforms is
daunting and time is of the essence if a further worsening of the
economic and financial crisis is to be averted.

Credible and sustained reforms, however, are not possible in
the absence of convincing investigations of suspected KKN
activities, both at the corporate as well as the individual
level, in strict accordance with existing laws and regulations.

Likewise, the implementation of the recently enacted
bankruptcy law will be handicapped from the start by a shortage
of experienced bankruptcy lawyers, not to mention bankruptcy
court judges who inevitably will be inundated by a myriad of
bankruptcy petitions.

Consequently, the request for qualified experts from the
international community would be in the best national interest
with related expenses absorbed by each respective donor country.

Joint legal, fiscal or investigatory ad hoc task forces,
headed and supported by untainted local expert staff could thus
become operational within a fairly short period of time. Their
very existence would significantly contribute to the restoration
of confidence and credibility both domestically and abroad.

Other confidence restoration or financial and economic
reconstruction measures need to be aimed at an influx of
permanent and non-international aid related foreign exchange.
Economic nationalism would have to be relegated to a back seat
and serious consideration given to a number of pragmatic and easy
to implement solutions.

Opening the real estate sector, for instance based on the
Singapore model with unrestricted foreign ownership, would go a
long way in bailing out a number of bankrupt property developers.

Also, the possibility of leasing out Batam to Singapore on a
long-term basis against a down payment of say $5 billion with
annual leasing fees of $500 million should not be rejected out of
hand.

Last but not least, ways and means have to be found to
repatriate the untold billions of Indonesian funds "parked"
abroad.

In the absence of sufficient public trust and confidence, few
if any of these funds can be expected to be repatriated
voluntarily.

In addition to attractive incentive schemes, such as dollar-
based government bonds with an above market yield, fundamental
reforms and wide-ranging security measures would be needed to
reassure Chinese-Indonesian offshore fund owners.

Other fund repatriation measures to be considered could range
from KKN-related amnesty deals to legal sanctions against others
convicted of ill-gotten wealth.

Window: The restoration of public trust and confidence should,
therefore, be given the highest possible priority on the
government's reform agenda and a realistic and self-critical
appraisal of all reform measures initiated to date should be
undertaken without further delay.