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.