RI's postcrisis financial sector
RI's postcrisis financial sector
By Eddy Soeparno
JAKARTA (JP): Indonesia, relative to other regional countries,
is still lagging way behind in terms of its economic recovery.
The country has just received a "Pass" grade from the
International Monetary Fund (IMF), after months of lengthy
negotiations, followed by delays in the disbursement of much-
needed funding.
Not surprisingly, Indonesia is now expected to remain at the
back of the recovery bandwagon, especially since it is encumbered
by masses of unresolved political baggage. The recovery could
also suffer from future setbacks should Indonesians fail to cope
with living in a newborn democracy -- because democracy, as good
as it may seem, by nature traditionally lengthens the decision-
making process in most aspects of life, particularly politics and
the economy.
However, nowadays this statement is not entirely correct. In
the cases of Thailand and South Korea, where democracy is in a
relatively more advanced stage than Indonesia, decisions are
being made by leaders who have the faith of the people, thus
making the process more efficient, and most importantly effective
as the decisions are adhered to by the people.
Yet, despite the above arguments, Indonesia remains a hot
favorite among East Asian countries, especially since the crisis
forced a shake-out in the corporate and banking sectors,
drastically changing the structure, if not the foundation, of
Indonesian businesses and ways of doing business.
In short, a new and much sounder Indonesia Inc. is soon
anticipated to emerge from the ashes of the crisis. However, to
get there, radical changes need to be taken either by free will
or at the behest of third parties -- be it the IMF, foreign state
donors, creditors, etc..
In the latter case, changes will practically be forced on
Indonesia. But what will the country's financial environment look
like in the years ahead? It will probably have the following
characteristics.
* Major business ownership shifts will take place.
Third party investors, not directly related to the founding
members of the business, will suddenly rise to take charge of
various establishments, while the former owners will see their
control in these entities shrink significantly.
As is widely known, most Indonesian business groups were born
shortly after the nation proclaimed its independence. During the
New Order era, these businesses flourished and some even grew to
become major conglomerates, either through dedication and hard
work or simply through favoritism, or what is better known today
as cronyism.
And since most of the businesses are in their first or second
generation, they are usually still family-owned and run.
This may no longer be the case in the near future. Most of the
new breed of Indonesian business groups or conglomerates were
nurtured by banks, both domestic and foreign, and the current
crisis will most see their dominant ownership in these companies
end, especially if their bankers' demands for debt payments are
not met satisfactorily.
Furthermore, the economic crisis has affected businesses so
badly that sooner rather than later, more business owners will
have to cede power to new partners, accepting the dilution of
their majority shareholdings.
* Gone are the days of easy credit.
Investors and creditors, in addition to demanding higher
premiums, will also demand high degrees of transparency and
internationally accepted business standards (such as
international accounting principles), prior to funding a business
or industry in the years to come.
Moreover, stringent credit terms and rigid conditions will be
imposed to a select number of borrowers trying to tap limited
sources of funding. Obviously, many of Indonesia's investors and
creditors have still not recovered from the "fireburns" of the
country's economic collapse, thus the allocation of capital will
be limited and selectively extended for, at least, the next five
years.
Nevertheless, soon after that, bankers and investors normally
develop selective "amnesia" and tend to overlend, overinvest or
overleverage themselves once again.
* The domestic markets will be wide open.
Historically, protected and therefore inefficient as well as
noncompetitive markets will open themselves either by choice or
by force. Negative capital will require the corporate sector to
seek new investors to keep concerns ongoing, while more than a
handful of financial institutions will require some form of
fund-raising or third-party capital injection to keep themselves
from being dragged into the Indonesian Bank Restructuring Agency
(IBRA).
Efforts to open domestic markets have already started,
evidenced by the government's announcement to allow full foreign
ownership of domestic banks.
On the other hand, the private banking sector, in its bid to
beef up battered balance sheets, began seeking new investors at
home and abroad even before any government initiatives were
announced.
It is, therefore, anticipated that large European, Japanese as
well as U.S.-based financial institutions will create a more
dominant presence in the local market by buying into the many
undercapitalized banks, which in return will create a more
competitive and, hopefully, sound financial system.
* A range of new financial instruments will be created or
developed.
The crisis should have taught everyone in the financial and
business sectors the importance of using the right financing tool
for any project.
Funding mismatches and foreign exchange speculation will
become a big no-no for banks in the future, now that they have
become more prudent.
As such, hedging instruments will be more frequently used,
especially for clients with significant foreign exchange exposure
and no foreign exchange revenue stream.
Hedging tools will also serve their actual purpose, namely
minimizing risk and not maximizing overall profitability.
In addition, more long-term funding instruments will be
developed to fund equally long-term investments, while lesser
reliance from bank financing will result in a rapid shift into
capital market-based funding. As such, a more active bond market,
providing long-term money will most likely characterize
Indonesia's financing structure in the future.
* Government-directed or politically motivated lending will all
but certainly disappear.
The new reform era has devoted itself to fighting all forms of
corruption, collusion and nepotism, much of what the previous
government was characterized by.
By saying that, banks, especially state-owned ones, should be
allowed to compete with other privately owned financial
institutions in both asset quality and profitability.
They should, apart from continuing their present status as
agents of development, also return to their basic root as risk
manager and, therefore, fund only economic and unrisky projects.
Financial institutions should not be encouraged or even forced
to fund risky automobile, toll road and other high-tech projects,
when they feel that the risks do not fall under their credit
criteria.
The problem with "guided lending" practices is that they
indirectly involve the use of publicly owned funds in an
imprudent manner.
No depositor would, in his right mind, allow his money to be
used to finance, say, an overly ambitious car project that
carries more political than economical weight. That viewpoint is
only logical because politics will certainly not bring a
depositor's money back, while economic-led activities should.
Finally, before one can say the financial environment has
reached an "after the crisis" stage, it has to actually go
through the crisis and remain committed to implementing changes
in order to remain intact throughout and following the crisis.
Banks and corporates, therefore, carry the burden of adapting
to these changes, while regulators need to respond quickly to
accommodate pressing demands to accelerate this new environment.
Strange as it may seem, the crisis has proven -- quite
literally -- to be an expensive lesson for Indonesia to learn the
importance of being a more competitive and internationally
accepted economy. Let's just hope that the price paid for the
lesson learned will bear fruit to justify the current economic
suffering.
It is necessary to mention that it is only in Indonesia's best
interests to allow the wind of change to breeze through its
economic and financial systems. After all, it will be a whole new
ball game once the crisis is over.
The writer is a corporate finance director of American Express
Bank.
Window: Strange as it may seem, the crisis has proven -- quite
literally -- to be an expensive lesson for Indonesia to learn the
importance of being a more competitive and internationally
accepted economy.