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.