Asia Times: 'Cash payments only' in limping economy



	January 13, 1999	atimes.com

Southeast Asia

'Cash payments only' in limping economy
By Kafil Yamin

JAKARTA - His publishing company has been gettingits stationery supplies from the same firm for years, makingpayments through bank transfers. But being a loyal customer nolonger allows Budiharjo's company that convenience. Now, it has topay the supplier in cash.

Budiharjo says there is no choice. ''If we don't pay in cash,out supplier refuses to send the stuff we need."

But if there are any hard feelings, they are directed toward thebanking sector, hit by an acute liquidity crisis amid an economythat shrank by 14 percent last year.

On the verge of collapse, state and private banks are unable toprovide credit services, including letters of credit and credittransfers.

All the banks do these days is try to convince Indonesians todeposit money by offering astonishingly high interest rates. Untillast November, the set interest rate on deposits was 62 percent.Today, it is at 40 percent, following the rupiah's recent rallyagainst the US dollar.

But Indonesians are choosing to keep their money under theirmattresses instead of putting it in the banks. Says Rahmadi, asugar distributor who keeps a cash box in his office: ''In thisuncertain situation, I don't want to take any risk."

Rahmadi turns down any payment by cheque or credit transfer madeby his customers. ''Business dealings become inefficient,'' headmits. ''But I [have to] do this."

Economists are worried about the bigger implications of this lackof liquidity.

''Without bank credit, how can we initiate productiveactivities?'' asks economist Didik J. Rachbini, who worries thatexport-oriented businesses will not grow. ''That means we cannotgenerate state revenue, which is badly needed to help heal theeconomy."

This month, the government will start recapitalising Indonesia'sailing banks, providing about 80 percent of the estimated 38billion dollars needed for their recovery. But there are a fewoptimists about the endeavour, and bickering over how thegovernment will raise the money is heating up.

Analysts say the situation has rendered them incapable ofguessing how the economy will fare in the next few months. Saysone financial expert: ''No one would be smart enough to makepredictions for even one month ahead."

Among the Asian countries hit by the financial crisis that beganwith the devaluation of the Thai baht in July 1997, Indonesia hassuffered the biggest blows. Its banking sector has suffered theheaviest casualties of the crisis, with as much as 75 percent oftotal loans proving to be non-performing.

Economists say the banks were so coddled during much of the 32-year rule of President Suharto that they became too foolhardy.

Many of them granted over-the-limit credit to companies withwhich they had corporate connections. But the Central Bank wasalways ready to help them avoid liquidity problems with injectionsof billions of rupiah.

''During Suharto's New Order, banks breached the legal lendinglimit and capital adequacy ratio (CAR),'' says noted economist DrSjahrir. ''But they never had problems."

He explains that authorities had looked the other way becausemost of the corporations served by the banks were those linked toSuharto's cronies and allies.

Sjahrir describes what took place: ''When a bank director gets acredit proposal from 'somebody', he or she should approve thecredit. There was no question about feasibility or proprieties."

Then the crisis hit, and political turmoil soon followed. In arecent issue, the 'Asiaweek' newsmagazine declared: ''Less thansix banks in all of Indonesia . . . may actually have assets thatexceed liabilities."

At least 70 of the remaining 166 local commercial banks will beincorporated in the recapitalisation programme. Banks with a CAR -a risk weighted asset ratio - lower than minus 25 percent will notbe recapitalised and will be dissolved. Those with CARs of morethan four percent will be considered solvent and will not be inthe programme.

The government has said it will raise the recapitalisation fundby issuing bonds.

In the new budget, the government puts its estimate of interestpayments on the bonds at $4.3 billion, 53 percent of whichwould be drawn from the budget. The remaining 47 percent wouldcome from the sale of banks' non-performing loans.

President Bacharuddin J. Habibie has also proposed that about $2.25billion from the state budget be set aside for the bankrecapitalisation programme - the first time public money is beingused to rescue sick banks.

The budget however calls a little less than that amount to becontributed by owners of 14 banks that the central bank helpedsurvive in the 1998.

Still, many legislators oppose using public money tohelp the banks, saying the amount is too high for such an austerebudget.

The proposal is expected to be defeated. Says legislator BudiSantoso of the ruling Golkar faction: ''When we are supposed totighten spending, the amount does not make sense."

The national budget, at $28.5 billion, falls short of theamount needed for the banks' recovery. Although he agrees thegovernment has no choice but to help the banks, Santoso notes thatthe Habibie government may be seen as favouring big business toomuch.

''When some 80 million poor people are in need of funds tosurvive, [Habibie] spends hundreds [sic] of billions of dollars toheal the banks,'' he observes. ''What an uneasy position forhim."

One legislator, however, has said the country's ravaged economysorely needs the bank recovery programme to succeed.

Some observers say the government may try to get money for theprogramme from either foreign loans or capital. A loan fromabroad, however, may only mean putting Indonesia's balance ofpayment under heavier pressure.

Fresh foreign capital, meanwhile, remains elusive because ofpolitical uncertainty.

High interest rates were supposed to lure in foreign funds. Butas Jardine Flemming Nusantara Research director Rizal BambangPrasetijo points out: ''With high political risk, an interest rateof 25 or 50 percent makes no difference."

(Inter Press Service)

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