Threat of another financial crisis

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.