Termination of blanket guarantee may hurt importers

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.