Who wants to be Indonesia's CFO?

By C.J. de Koning

JAKARTA (JP): Last year at about this time, Indonesia was enjoying an economic growth rate of about 8 percent.

It had an inflation rate of about 7 percent per annum, a balanced government budget, a current account deficit running at about 3.5 percent of the Gross Domestic Product (GDP), smaller than a number of neighboring countries, and a banking sector with a number of weak spots.

But nowhere near the current situation, this banking sector had total liabilities of Rp 427 trillion (US$174 billion).

Indonesia's GDP was estimated to run at $200 billion over 1997. Exports accounted for $52 billion and imports for $44 billion per annum.

Last but not least, Indonesia had borrowed $137 billion from international sources, $57 billion by the government and $80 billion by the corporate sector.

So far, this is the success story of Indonesia Inc.

Then Thailand's economic slide started; international cash flows started to change also for Indonesia. Such cash flows can be split into two groups: those originating from international trade-related flows and those from international capital flows to and from Indonesia.

Trade flows on the export side continued relatively unharmed until April this year, with exports keeping up reasonably well, but imports dropping off substantially. Currently, the lack of preexport finance at competitive world level interest rates is hampering such export levels. Also for imports, there are very limited finance mechanisms still in place to support imports.

Capital flows originate from various sources. Inflows are loans from the International Monetary Fund (IMF), the World Bank, the Asian Development Bank (ADB) and from foreign commercial banks, as well as from international depositors and capital markets.

Inflows can also come from overseas investors, looking to buy local assets.

Outflows come from servicing debts (government and private), outward-bound portfolio investment or disinvestment by foreigners in the local capital markets and free currency transfers.

The net difference in inflows and outflows determines the volume of net capital flow per period.

Trade and capital flows determine the foreign currency cash flow of a country.

The most important indicator and warning signal for substantial net capital outflows over trade flows is, of course, the interest differential between onshore and offshore dollars.

In Indonesia, at the end of November 1997, this differential for one-month dollars was 1.750 percent. End of December 1997 this differential had shot up to 9.06 percent and reached 12.4 percent on Jan. 23, 1998. Currently, it stands at 9.4 percent.

What could be the role of a chief financial officer (CFO) for Indonesia?

A CFO here would think in terms of the country's liquidity, its solvency, its level of sales to outside markets, its external debt levels and maturity profile, cost of capital (i.e. interest rates), its cash-flow projections, its financial reserves, the transition cycle from fixed assets to liquid assets, and its price setting (i.e. exchange rates).

The CFO would also think about output growth, capacity utilization and the number of people employed.

A CFO for Indonesia would have noticed in December last year that the price for dollars liquidity had gone up tremendously, indicating a very serious imbalance in supply and demand for dollars here.

The CFO would also have known that many factors hampered the unimpaired supply of dollar liquidity to banks operating in Indonesia. Those banks were strictly limited in accepting dollars from overseas depositors at this new rate.

The CFO would know that there was no cost transfer mechanism in place to charge such increases in dollar borrowing costs to the Indonesian government and to corporate borrowers, in their capacity as local borrowers of foreign currencies, jointly creating the main demand for foreign currency cash outflows.

The CFO for Indonesia could have wondered what the effects would be of international trade finance transactions being locked up until June 1998 in the 16 local banks which were closed on November 1, 1997.

The effect was to increase risks for international lenders on trade finance to a level equal to all other corporate risks. As trade finance is the oil in the export and import machine and is priced usually very competitively, a dramatic fall in trade finance lines became apparent in the months following November 1997, leading to further capital outflows and a lack of dollar liquidity for the exporting sector.

The CFO would also have wondered about its foreign currency debt levels, both private and public and about its average maturity. In total, $137 billion was outstanding, $80 billion of which belonged to the corporate sector; the latter having a very short average maturity level.

The CFO -- having studied the debt tables -- would have noted that Indonesia was financed as an airline with much too short a maturity profile leading to a grounding of its planes and finally destruction of capital invested in the planes.

The CFO would certainly have available cash-flow projections indicating expected earnings (i.e. net export earnings). Capital inflows from such -- timing wise unpredictable -- sources as the IMF, the World Bank and the ADB, as well as payment obligations to its workforce, and to outside creditors. Such cash-flow projections would have to be updated frequently in order to reflect short-term capital flow movements.

The CFO, no doubt, would have noted that the measurement of foreign currency reserves in terms of the number of months in import requirements has become a superfluous yardstick, as international reserves now need to be built up to defend a currency not only against shortfalls on the trade account but also as an eliminating factor against short-term capital outflows.

The CFO would, looking at the country's assets, have wondered how long it would take to turn inventories, its own debtors, and fixed assets into liquid assets. Would this asset conversion take three, six or 12 months, and what program could assist in such conversion.

The CFO would finally look at his external price setting (i.e. exchange rates) and his internal capacity utilization rates and cost developments (inflation rate).

The job of a CFO is a core one for the economic health of a country. There is only a one-letter difference between: "to run a business" and "to ruin a business", and this is the letter "i". The main task of the CFO is to create the circumstances that the "i" does not dominate in running Indonesia's business.

What could be an overall conclusion for Indonesia's CFO ?

The prime conclusion could be that the country is still very solvent with only $137 billion debts, which is a small percentage of the value of the country's assets.

However, the country's liquidity position is far from enviable and needs a quick and sizable boost. IMF resources alone do not cover the liquidity gap, as evidenced by the continuing high dollar interest differential between onshore and offshore. Such funds are also not on demand and available in the size and at the time when liquidity boosts are needed.

The CFO could, for instance, negotiate with its lenders to turn some of the short term into longer term liabilities, as has been aimed for by the Frankfurt agreement. The CFO could also increase its short term liquid assets by placing Bank Indonesia promissory notes (SBIs) in dollars with overseas investors at attractive interest rates to them.

The CFO could take measures to promote overseas sales (exports) via export financing schemes and other support measures.

The CFO could manage to sell some of the country's assets to foreign buyers. This is currently being undertaken in the state sector. The private sector has, generally, not yet started to sell assets.

One particular asset could be real estate sales, whereby 99 year leases and a one-stop government service could be very helpful.

On the external debt level, the CFO could, for the future, consider to move to a situation where he/she limits this level to twice the annual value of export level.

Furthermore, he/she could consider to gradually increase the international reserves level to become equal to one-time annual export level. In addition, the international debt maturity profile would need to be set off against expected net export earnings, in cash flow projections, making sure that the average maturity matches cash incomes.

On the price setting level (exchange rate), the CFO has to perform a balancing act between capacity utilization of the country, including the number of people employed and their income levels as expressed in international currency, and the expected international demand level for the country's goods and services.

This becomes all the more complicated if foreign currency liquidity problems overshadow this price setting.

Can it be right, however, that a liquidity shortfall of $40 billion to $50 billion (equal to the purchase price of 280 to 350 Boeing 747's) would put 20 million to 30 million Indonesians out of jobs and without any source of income?

Furthermore, is it the right strategy to put up one internal cost level (i.e. rupiah interest rates) to such a level that the local capacity utilization level is not hampered from outside the country but from internal causes?

Would it not be better to promote international savings to be channeled to Indonesia as a liquidity boosting measure?

Ruining a business is the easy part, running it is much more complicated.

Rumors have it that there are a number of Indonesians who want to become the CEO or president of this country. Is there an equal interest for the job of CFO for running the business side of this country? Hopefully.

The writer is country manager Indonesia for ABN AMRO Bank. The article has been written in a personal capacity.