Termination of blanket guarantee may hurt importers

Dadan Wijaksana, The Jakarta Post, Jakarta

Plans by the government to phase out its blanket guarantee on bank deposits and claims will affect the flow of the country's imports unless the government moves quickly to boost confidence in the country's economy and banking industry, businessmen have said.

The termination of the blanket guarantee program means that letters of credit (LCs) issued by local banks in the name of importers will no longer be guaranteed by the government. This in turn could cause trouble for importers in financing their trade activities as foreign banks might reject the local LCs because of the fragile condition of local banks.

Businessman Anton J. Supit said that it was crucial for the government to quickly boost the confidence of the international business community in the country's economy.

"... I agree in general with the plans, but without simultaneous efforts that could bring back international confidence, a lot of importers will be hurt by this," Anton told The Jakarta Post on Monday.

One of the immediate impacts of this policy -- should it materialize -- is that importers may rush to ask foreign-based banks operating in the country to issue the LCs on their behalf.

"But it's impossible for those multinational banks to issue LCs for all local importers, as they have a limited allocation from their headquarters.

"So, it's important to create a favorable business climate because that's the only thing that can bring back confidence," Anton added.

He was commenting on the planned phasing out of the blanket guarantee scheme, starting February next year.

The plan, if approved by the Cabinet, is expected to be officially announced on July 31 and will come into effect on Feb. 1, 2003.

Under the plan, the government's guarantee on LCs issued by local banks will be among the first to be terminated. The others include debt notes issued by banks, direct loans, standby loans, and derivative transactions.

This will be followed by the termination of a guarantee on bank third-party funds worth over Rp 5 billion and interbank loans as of August 2003.

And in February 2004, guarantees for third-party funds over Rp 100 million will be terminated, while funds of Rp 100 million or less will continue to be protected via a deposit insurance facility which will soon be established.

The plan is regarded as necessary not only to ease the burden on the state budget, but also to help remove the "moral hazards" among bankers and minimize the cost of any bank failures.

Since the crisis, most of the LCs issued by local banks drew little attention from international traders. The government had to come up with the current guarantee scheme to help create confidence in local investors.

The scheme was introduced in 1998.

But now that the LCs issued by local banks will no longer be guaranteed, it is feared that the already dwindling export performance will be put under greater pressure.

The country's production system is largely dependent on imported raw materials.

However, Amirudin Saud, chairman of the Indonesian Importers and Exporters Association, emphasized that the plan would have a minor impact on exports.

Amirudin claimed that many exporters that import their raw materials, have already used LCs issued by multinational banks for their import transactions, while a small number, who have good trading track records, do not even have to use LCs.

"For those who have a long-term relationship with their suppliers overseas, they do not even need an LC," he told the Post.

According to Amirudin, exporters who are excluded from these two categories and do need to obtain the LCs from local banks, account for fewer than 1 percent.

This year, his association has targeted a total export value of between US$30 billion to $35 billion, not far from last year's figure of $33 billion.