Threat of another financial crisis

By Sahala Sianipar

SINGAPORE (JP): The economic slowdown in the United States has certainly affected economies in Southeast Asia. Announcements of lower corporate earnings have continued to dominate the region's business and financial media for the past three months.

The collapse of Internet-related companies contributed to the dismal performance of NASDAQ and even major bourses, including the New York Stock Exchange.

The share price of a major blue chip in Singapore, Singapore Telecommunication, has reached an all-time low despite the recent announcement on its largest overseas acquisition in the form of Optus Australia.

Following the financial crisis in 1997, economies in Southeast Asia were able to register high economic growth primarily due to strong exports to the United States and the demand for electronics components.

After more than five years of economic expansion, the U.S economy began to slow down in the fourth quarter of 2000. Demand for electronics and information technology products declined dramatically forcing companies such as Creative Technology, IBM and Cisco to downsize their operations worldwide.

Do these two factors provide enough grounds for worrying about another financial crisis along the lines of the 1997 crisis? While these two factors undoubtedly contribute to a possible downturn in many Southeast Asian economies, the major contributing factor is the lack of structural economic reform implemented by many governments in the region.

The lack of structural economic reform in Indonesia, Thailand and Malaysia, which should promote greater transparency and economic efficiency, will have an adverse impact on these countries' plans to maintain sustained growth.

A closer look at the Indonesian economy following the financial crisis of 1997 suggests that the economy has not changed towards being a more transparent and efficient one.

While the economy grew at 4.77 percent in the fourth quarter of 2000 due to strong exports, several indicators suggest that this growth will not be sustained.

First, the banking sector, in particular among state-owned banks, remains insolvent. These banks have not been successful in addressing their nonperforming loans (NPLs). Merger in the banking sector remains distorted by conflicts between owners and interested investors, with the legislative body and other interested organizations often intervening during negotiations.

The Indonesian Bank Restructuring Agency (IBRA) will face difficult challenges in selling off Bank Central Asia and Bank Niaga while the potential for intervention by lawmakers and other interested parties remain high.

More alarming is the ability of the banks to remain in operation without additional funding from the government. To what extent have state-owned banks such as Bank Mandiri, BNI '46 or BRI collected their non-performing loans, which would contribute to minimizing the state budget?

The second obstacle to achieving sustained growth is the fact that transaction costs remain high in Indonesia. There have not been comprehensive policies to reduce transaction costs to enhance the level of competitiveness in the country.

Costs for interisland trade remain high due to tariff and non- tariff barriers. The recent statement made by the President about a review of the laws on regional autonomy and fiscal balance should be followed up by concrete action to address the impact of decentralization on the competitiveness of the local and national economy.

The third obstacle to achieving sustained economic development in Indonesia is the continued concentration of economic opportunity among state-owned enterprises (SOEs) and large enterprises.

As long as these enterprises can provide goods and services efficiently and without the support of the government (i.e. through subsidies or protection), the outcome will be positive.

The concentration of economic opportunity among SOEs and large enterprises remains in place following the financial crisis and they continue to receive government subsidies, which threaten the government's ability to provide basic service to the most needy.

The antimonopoly law should apply to all enterprises including SOEs to ensure a level playing field.

The fourth obstacle is the absence of judicial reform in Indonesia, including in the field of commercial law. Policy makers need to acknowledge that weak legal infrastructure will reduce the country's competitiveness in attracting direct investment and, more importantly, winning public trust for the economy.

How can the government persuade ordinary citizens to comply with rules and regulations when they know the same rules do not apply to certain powerful people?

The fifth obstacle is the lack of adequate infrastructure to support economic activities in the country. Telephone penetration per 100 people in Indonesia remains the lowest compared to Malaysia and Thailand. Land transport is not easy when major repairs need to be done. Under the new regional autonomy law, it is hoped that local governments will put priority on improving the infrastructure in their areas to facilitate increased trade.

These five issues, which already existed before the crisis began in 1997, will pose problems if nothing is done to address them. The concern is that the cost of addressing these issues will be much higher in the future.

The international organizations will not be able to provide as much as they did in 1997. The international financial community has witnessed the challenges of bringing about reform in Indonesia over the past four years. Collaboration between the government and lawmakers to prepare a comprehensive agenda for improving the economy's competitiveness is urgently needed to avoid another round of economic crisis in Indonesia.

These policies can have an immediate impact on enhancing competitiveness -- such as the removal of excessive licensing requirements to open or renew a business, revision and consistent implementation of the bankruptcy law, the removal of excessive tariff and non-tariff barriers to domestic trade and the consolidation of the banking sector without outside intervention.

The writer is a business development director for an Internet solutions provider in Singapore. He earlier managed an economic and SME reform program in Indonesia. The above views are personal.