ECONOMICS: Stalled Indonesia
Far Eastern Economic Review
March 5, 1998
No Quick Fix:
But there are ways to get the economy moving
* By Salil Tripathi in Jakarta
In a crowded corner of Jakarta's Pasar Senen, Rahmi takes out a worn
20,000-rupiah ($2) note to buy three kilograms of vegetable oil from her
grocer, Sim Kwong Cun. Barely three months ago, she paid 30% less -- for
four kilograms. The 49-year-old food-stall owner uses the oil to fry the
meat and cook the Padang-style rice dishes she has been serving
customers for 15 years.
In a quiet, resigned tone, she says: "I have to make do with
oil, because I can't raise my prices." Rahmi's customers are the
foot-soldiers of Jakarta's economy, the service-sector working class of
Jakarta, and she knows they can't pay more. Her daily turnover has
fallen steeply, from 600,000 rupiah to 400,000 rupiah. That's not enough
for the mother of seven, who runs the stall with her husband and eldest
daughter, to break even.
Grocer Sim nods in sympathy: demand for food at his shop has dropped
60% in the last three months alone, and with the rupiah's relentless
fall into the abyss of devaluation, there seems to be no end in sight.
The financial turmoil that has enveloped Indonesia is biting
just where it hurts most. Ballooning inflation is wounding what
Suharto's newest economic guru, American economist Steve Hanke, calls
"the little people." They have lost jobs in factories that have pulled
down shutters in Tangerang and Bekasi even as they have to pay more for
milk, chicken and rice. Yet if the government follows International
Monetary Fund prescriptions and slashes subsidies on staples such as
rice and sugar in the coming weeks, the spectre of massive social unrest
Despite such pressures, President Suharto wasted half of February
toying with the idea of a currency board that would peg the rupiah to
the U.S. dollar. That attempt at a quick fix nearly prompted the IMF to
back off from its bailout plan for Indonesia. But now that it appears
that the currency-board idea has been shelved -- at least temporarily --
the government has to get down to the real job of resuscitating the
That, in the eyes of most economists, means three things: get
finance moving, restart the stalled debt-renegotiation process and
reaffirm banking reforms. In other words, any plan to revive the economy
must start with Indonesian factories getting the funds they need to
restart production. Then, creditors need to agree to reschedule -- and
in some cases forgive -- the debt hanging over the country, and strong
and stable banks must emerge from the bank-consolidation process.
Though doubts remain about an overall commitment to reform --
least because monopolies controlled by Suharto's friends and family
appear to be searching for ways to keep going -- a few pieces of the
confidence-restoration plan are already starting to take shape. Bank
Indonesia, the country's central bank, has raised the threshold of local
banks' paid-up capital to 1 trillion rupiah ($105 million). This will
result in the elimination of all but 10 of Indonesia's 240 banks --
unless they merge.
Meanwhile, former Finance Minister Radius Prawiro is heading
committee of Indonesia's corporate debtors. This body will negotiate
with a bankers' steering committee headed by Hong Kong-based David
Brougham of Standard Chartered Bank to defuse the debt bomb. In
addition, the Indonesian Bank Restructuring Agency promises to guarantee
every deposit in Indonesian banks for two years.
But perhaps the most vital effort to get Indonesia back on its
is coming from its biggest trading partners, with Singapore, Japan and
the United States promising credit guarantees and export financing.
That's a vital measure to jump-start the Indonesian economy: Exports
have been nearly frozen this year, with foreign institutions refusing to
honour letters of credit drawn on the country's crisis-hit banks.
Singapore's plan appears the most heful. Its prime virtue is
it is multilateral and multinational; the American and Japanese
proposals, on the other hand, are aimed at boosting bilateral trade.
Singapore Premier Goh Chok Tong has written to the heads of state of
Indonesia's 10 leading trading partners seeking support for a $20
billion facility, to which Singapore would contribute $2 billion.
Under the plan, about a dozen banks would provide export financing
for Indonesian firms so they can buy raw materials and manufacture
goods. The governments will offer counter-guarantees so that the
overseas buyers' risk is minimized.
"The IMF is addressing structural issues which are important
long term, but the private sector has to come up with a solution to get
the economy moving again," says C.J. de Koning, country manager of
ABN-Amro Bank in Jakarta. De Koning is working closely with Singapore's
Premier Goh on the trade-finance package.
Exports alone can generate cash flow in the absence of fresh
investments, De Koning says. And without the cash flow, the companies
will never be able to repay their debt. Creditors don't oppose the plan.
"Indonesia is like a black hole just now. Anything that can get business
moving is positive," says a Hong Kong-based creditor staring glumly at
his glass of beer in Jakarta.
The creditors will have to agree to stretch the debt maturity,
inflexibility in repayment schedules is a key cause of the crisis. Of
Indonesia's total private-sector debt of $74 billion, ABN-Amro estimates
that close to $59 billion is due for repayment this year. The average
tenure of most loans is 18 months.
Yet the total of Indonesia's 1997 exports was $58 billion. With
foreign reserves of $17 billion, of which nearly $8 billion is committed
towards government repayment of debt, and an import bill of $42 billion,
the math just doesn't add up: There is no way Indonesian companies can
hope to repay a dime unless debt maturity is stretched.
Which is why a trade-financing package, rather than a more exotic
currency policy, could work wonders. Once repayments begin, the market
will regain confidence in Indonesia, provided the political situation
doesn't become unstable. And that confidence could support the rupiah.
To make the plan workable, Indonesia will have to set up a credit
clearing house for corporate debt, a trade-finance authority to
guarantee foreign trade, and an offshore-banking facility within the
country to make it attractive for Indonesian companies to bring their
export earnings home.
That's a tall order. Experts believe the trade-finance facility
take at least six months to show results. But once the market sees debt
being repaid, cheques not bouncing and banks not crumbling, the private
sector will regain some colour on its cheeks.
"If all of this is achieved," says an IMF official, "the market
be confident about Indonesia once again, and there may not be any need
for a currency board." And a stable rupiah will also bring some cheer to
Rahmi and Sim.