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Chapter III. The Indonesian Financial Crisis
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Chapter III. The Indonesian Financial CrisisBackground of the Indonesian Financial CrisisThere are many factors caused the Indonesian financial crisis. Some people believed that the financial crisis occurred suddenly without a distinctive hint by international conspiracy. Such an allegation is very controversial. However, it is not difficult to find many symptoms that triggered the financial crisis. The most important thesis on the Indonesian financial crisis is that Indonesia did not have enough foreign reserve to repay its debt. Namely, Indonesia did not earn enough foreign reserve. The international market was very unfavorable to Indonesia. First, the competition in the labor-intensive commodity exports became very severe. Second, the export from China, which is a strong competitor for the Indonesian labor-intensive export industry, increased rapidly as the Yuan of China devalued about 50 percent in January 1994. Third, the price of crude oil, one of the most important income sources, dropped severely. The price competitiveness of the Indonesian export commodities was weakened by appreciation of the Rupia because the appreciation of US dollar to Japanese Yen raised Rupia’s value, which was connected with US dollar’s value. The Indonesian private sector excessively financed offshore borrowing after serial reforms in 1983. Especially excessive short-term foreign debt became a dangerous catalyst and excessive foreign capital inflow raised the Rupia’s value extraordinarily, which exacerbated the price competitiveness of the Indonesian export industry. The Indonesian politics, which had maintained its stability for several decades under the rules of Mr. Suharto began to tremble as Mr. Suharto aged. The severe forest fire and the long draught caused by the El Nino decreased about 10% of the rice production and raised the consumer’s price level profoundly. The strong leadership to overcome the crisis had already disappeared. Table 1. Key Indicators of Indonesian Economy: 1990-1996 (In percent of GDP)
Sources: IMF, International Financial Statistics. IMF, Annual Report, 1996 and 1997. World Bank, World Debt Tables: External Finance for Developing Countries 1996. World Bank, World Development Indicators. Causes of the Indonesian Financial Crisis Macroeconomic Policy O Exchange Rate Policy The exchange rate system with the intervention band has played an important role in the Indonesian financial crisis. The exchange rate has a significant impact on exports because it is one of the crucial determining factors of international competitiveness. The Indonesian exchange rate policy has always carefully managed a reasonable devaluation of the Rupia to maintain external competitiveness. The authorities devalued the Rupia by 50% compared to the US dollar and replaced the US dollar as its external anchor with the managed floating exchange rate system. The weight of the US dollar in the currency basket remained substantially under the managed floating exchange rate system. The monetary authorities have basically pursued the devaluation of the Rupia by 3 to 5percent annually. The Indonesian monetary authorities faced the need of an adjustment in the exchange rate system because the Indonesian economy, mired in dilemma, began to fall apart. The Rupia was appreciated in the mid-1990s as strong the US dollar which was Rupia’s main external anchor. The exchange rate of the Japanese Yen to the US dollar shifted from 85 in 1995 to 127 in 1997. This change weakened the external competitiveness of the Indonesian export industry. It destroyed the efficient decision of saving and investment, and thus the valuable scarce saving was wasted on unproductive investment projects. At this juncture, the monetary authorities should have selected the floating exchange rate system or widened the managing floating exchange rate system. This move resulted in a considerable amount of current account deficit. Although the authorities were aware of the need for change in the Indonesian exchange system, they were unable to opt for the alternative, which was sure to bring on high inflation and increase of unemployment. As a result, the Indonesian economy faced disaster and gave up the exchange rate system with narrow width of adjustment. m Foreign Debt The Indonesian economy faced a financial crisis and collapsed languidly in 1997. What was the most fundamental cause? One of the most important factors was excessive foreign debt, which surpassed the control capability of the relatively small Indonesian economy. The total amount of external Indonesian debt was U$ 134billion. This was two thirds of GDP and twice the export value in 1997. This meant that the Indonesian economy became very fragile against unfavorable external changes and was on the verge of collapse. The Indonesian government implemented high economic growth policy and eased the restriction of foreign capital inflow because they wanted foreign capital and advanced technology to help its economic development. The Western capital was also eager to find a profitable market, which guaranteed a high and safe yield. For the West, Indonesia showed promises of profitable investment as Indonesia was known for a high economic growth for several decades under the stable rule of President Suharto. The short-term loan was about US$ 68billion in 1997 and most of the short external debt (US$ 49.3billion) was borrowed from foreign banks. The tenure of US$ 30billion foreign debt was less than one year. The average maturity of the short-term external debt (US$ 67billion) was about 1.5years. This appeared as a serious problem during the foreign exchange crisis and triggered the collapse of the Indonesian economy. The private sector’s borrowing has increased rapidly in the 1990‘s. Over two-thirds of the bank loans (US$ 33billion) was borrowed by the non-financial private sector. Most of the private sector’s external debt was for economic infrastructure projects, which were owned by politically, connected conglomerates, and received implicit and explicit guarantee of the government. The Indonesian government has tried to control the external debt but the attempts have proved ineffective. Indonesia established a connecting system to obtain and use the ceiling, and abolished the implicit subsidy on the premium of exchange rate swap facility, which was implemented to induce foreign capital inflow. m Current Account Deficit There are many common characteristics among Indonesia, Mexico, Brazil and Russia. First, these countries have abundant natural resources, and therefore yield a considerable trade surplus every year. Second, they had plans to join the ranks of the advanced countries with ambitious investment, and depended on their natural resources, especially crude oil. Third, all of them are holders of foreign debt in high ranking worldwide. Fourth, all of them have experienced severe setback resulting from their reckless avidity. Indonesia is one of the failure cases proving that advantageous and favorable natural environment never guarantees prosperity without rational human efforts. The Indonesian economy has maintained sustainable current account deficit of 2% of GDP until 1994. The current account deficit rose to a dangerous level of 3.7 percent in 1996. Generally speaking, if the current account deficit of a national economy surpasses 4%, the economy will be in danger. There were many factors, which caused the increase of the current account deficit. First, the external competitiveness of Indonesian commodities was weakened rapidly as China devalued Yuan by 50% and Rupia was over valued due to the devaluation of Japanese Yen. The trade surplus decreased. Second, the investment rate has always surpassed the high saving rate(about 30%) because the Indonesian government has pursued a high economic growth. Third, the private sector borrowed foreign debt excessively after the liberalization of foreign capital inflow. The total amount of foreign debt was about two thirds of the GDP. The debt service ratio was about 34% in 1996. The use of foreign capital was not sound. To a considerable extent, the proceeds were used for infrastructure and other non-tradable industry including land-based industry like hotel, tourist resorts, real estates, shopping malls, and so on. Fourth, the Indonesian government has played an important role in exacerbating foreign debt and current account deficit. The government attempted to decrease the burden of repayment of external debt with the proceeds by privatizing state-owned enterprises and with expenditure-reducing policy. The policies produced somewhat good results, such as, budget surplus and prepayment of expensive foreign debt. However, they permitted too many exceptions such as strategic industries, national car program and excessive infrastructure projects. The budget surplus that resulted from various efforts of the Indonesian government was not enough to counter the rapid expansion of the off-budget expenditure and government sponsored projects. Banking Crisis m Rapid Increase of Foreign Capital Inflow and Banking Credit The core of the Indonesian financial crisis was the banking crisis and the core of the banking crisis was the loss of trust to repay debt to foreign creditors. The rapid increase of foreign capital caused a massive current account deficit, and therefore, the capability of Indonesian economy to repay debt was questioned. Furthermore a huge amount of Non-performing loans struck the banking sector’s credit. Of course, a substantial increase of NPLs was brought about by rapid expansion of banking credit. The Indonesian monetary authorities have released many restriction (including interest rate, complicated lending ceiling with subsidized interest rate, entrance barrier, and so on) since 1983. These reforms have had a significant impact on the banking industry, and have especially promoted competition, as the reforms permitted the participation of new banks, foreign banks, NBFIs (Non-Bank Financial Institutes) in the banking sector. These reforms also lifted the restrictions on bank lending, asset activities, and [to lend in easier bankable sector as land-based industries. The excessive increase of bank credit caused a serious bubble in the Indonesian economy and produced disasters like NPLs for banks when the bubble burst. Also the excessive bank credit discouraged efficient investment of the Indonesian economy because the bank loan officer did not and could not evaluate the feasibility of the borrowers’ projects. The Indonesian financial authorities have been very generous to foreign exchange transaction relating to export and FDI (Foreign Direct Investment). The serial reforms since 1983 induced a huge amount of foreign capital inflow, which reached two thirds of GDP in 1997 as the foreign investors, believed that Indonesia was a very stable and promising emerging market. The foreign investors were interested in infrastructure project, working capital of Indonesian firms and banks, and capital market to acquire Indonesian companies equity and bonds. The unsustainable level of Indonesian foreign debt meant that the Indonesian authorities’ autonomy of the monetary policy was almost lost and very fragile against external changes. Also the rapid and massive capital inflow contributed to an increase in the bank credit and to expand the bubble of Indonesian economy. O Serious Mismatch of Maturity and Currency in Indonesian Banking Sector As one of the distinctive characteristics of Indonesian banks, the Indonesian banks have a special asset structure that consists of short-term borrowing and long-term lending, and a considerable portion (18% in total debt in 1998) of the asset is denominated by foreign currency. The Indonesian bank’s asset structure could be deadly poisonous for banks during the financial crisis. The serial reforms permitted the Indonesian firms to open foreign currency accounts and to take loans denominated by foreign currency from banks. As a result, much of the private sector’s debt was denominated by foreign currency and became a substantial danger. Because the Indonesian Rupia has historically shown a stable and predictable value, the danger was not explicit. The short-term borrowing and long-term lending provided banks with more profits during a peaceful time. The Indonesian banks tended to prefer the foreign currency denominated loan when the domestic interest rate was high due to funding cost. The banks’ asset combination of short-term borrowing, long-term lending and high portion of foreign currency denominated asset can be explained as undeveloped financial system without sound and capable supervisory institutes. The exchange rate of Rupia increased very rapidly from 1997 to 1998. The severe devaluation of Rupia inflicted Indonesian banks with serious disasters. The value of banks’ asset decreased rapidly by the devaluation of Rupia because of their over valued foreign currency denominated debt. Most of them did not hedge their foreign currency liabilities. The Indonesian banks had to pay high cost to revolve their short-term liabilities during the financial crisis. The unsound Indonesian banks’ asset structure caused serious liquidity problem after the rapid devaluation of Rupia. Especially the unlisted banks that were incapable of raising long-term stable source of funding in the capital market had to undergo harsh difficulties. The high portion of foreign currency denominated lending also increased the burden of repayment burden, especially for their customers, which soon connected with increased NPLs. The Indonesian banks were critically hit by the collapse of customers and increased NPLs. Their situation and the path to failure were similar to the case of Korea. O Weak Financial Position and NPLs of Banks Liberalization of the banking sector lowered the capital requirement to enter the industry and reserve requirement. The 22banks (out of 240 banks in total in 1995) could not meet 8% of the capital adequacy ratio. The tendency of under- capitalization was conspicuous in state-owned banks. The weak capitalization of banks has strong correlation with NPLs. This phenomenon is that of vicious circulation. Generally, undercapitalized banks want high yield and therefore take high-risk asset due to their poor financial position. The risky loan assets are apt to go bankrupt easily during a period of economic depression. The asset became non-performing loan and the non-performing loan eroded bank’s capital base. In the case of Indonesian banking system, there is an implicit guarantee that the government will solve the insolvency of state-owned banks through fiscal budget. The state-owned banks did not need enough capital base and did not have an incentive to liquidate the problem loans at an early stage. The loan officer was quite powerless because they had to just follow governmental instruction; therefore, it was very difficult for them to evaluate risks and feasibility of projects. As a result, the non-performing loans snowballed in a short time. O Government Involvement Government involvement in the financial sector, meaning the allocation of limited resorces via economic policy, is not a peculiar phenomenon limited to Indonesia, but a widespread practice in underdeveloped countries. Many banks have been established since the reform in 1988. The 6 state-owned banks were legally transferred to private banks in 1992. Despite the privatization of many banks, the government still retains a strong hold on the ownership of banks. The government has interfered with all of the bank affairs (including personnel, technical affairs). Of course, the government was deeply involved in the loan decision making. Most of the beneficiaries had political connections and were the conglomerates that dominate the Indonesian economy. The financial activities of current decades are quite different from those of previous times. The government officials are not financial experts; therefore can not be involved and must not be involved in banking industries. Furthermore, generally, their involvement is closely related to black transaction, such as bribe. The unnecessary interference of the government distorted and spoiled the financial sector. It was one of important factors which triggered the collapse of the Indonesian economy. The Indonesian financial authorities adopted the CAMEL(Capital adequacy, Asset quality, Management, Earning, and Liquidity) system to regulate and to supervise bank more prudently in 1991 after the substantial liberalization of the banking sector. However, the restrictive system was not rigorously implemented. The necessary requirements, prudential supervision for the advancement of financial system liberalization are not problems of formal regulation but the will of regulators for rigorous implementation. O The Central Bank: Bank Indonesia The primary role of the central bank generally consists of three categories, which are: issuing and management of domestic currency, supervision for financial sector, and lastly, acting as lender of last resort. Though the Bank Indonesia adopted the CAMEL system in 1991, the Indonesian financial system lacked a sound market infrastructure. Some banks relating to big conglomerates often-violated limit regulation which restricted lending to special related parties like sister companies or owner of banks. In this case, the banks are unable to fairly evaluate their sister companies and their projects; therefore, much of the loans for sister companies can be non-performing loan. The loan assets mainly came from the deposits owned by the public but there was no deposit insurance. There was always the danger of bank run against extremely unfavorable shocks. Bank Indonesia played an important role as the lender of last resort during the financial crisis. The Bank Indonesia provided distressed banks with equity capital injections, liquidity credit, financial supports, and acquired shares of problem banks. The function of the central bank as the lender of last resort is to prevent distressed banks from bank run at a crisis. Many banks depended exclusively for their survival on the financial injection from the Bank Indonesia. In reality, it is argued that Bank Indonesia is only acting as the lender of last resort for state-owned banks and for politically well connected financial institutes. Consequences of the Indonesian Financial Crisis The Asian financial crisis was triggered by several attacks of international speculators. The Indonesian government asked for the IMF rescue package, and the total amount of US$ 40billion IMF rescue package program was signed in November 1997. The Bank Indonesia abandoned the exchange rate intervention band and moved to the floating exchange rate system to preserve its external reserve position. The external value of the Rupia was depreciated seriously, and the Rupia was recorded at 17,000 to a dollar on January 22, 1998. The composite stock price index at the Jakarta Stock Exchange plunged by more than 50 percent from July 1997 to August 1997. At the same time, bank deposit and loan interest rate rose to over 50 percent per annum. Especially the closures of 16 financially distressed private banks in November 1997 ignited bank run, panic buying and capital flight. Because of losing confidence from the international financial market, the Indonesian banks could not rollover their short-term foreign debt. The Letter of Credit issued by the Indonesian banks was also rejected. The Indonesian people experienced harsh distress. President Suharto resigned in May 1998. Fiscal Stabilization Programs With the collapse of Indonesian economy in 1997, the Indonesian government was forced to implement stabilization policy to decrease budget deficit. The Indonesian government has maintained a balanced budget. If the budget deficit was inevitable, the budget deficit was offset by ODA(Official Development Aid) and privatization proceeds. But everything has changed since 1997, and thus, the Indonesian government had to solve the problem of budget deficit which imposed heavy pressure directly on aggregate currency and inflation rate. The government had to increase revenue from tax and profits of public enterprises. It was very difficult for the government to raise revenue from the private sector due to economic recession, rising unemployment rate and high inflation rate. However there was a huge demand for the government expenditure to pay for public external debt, to stabilize consumer price, to lower unemployment and to restructure banking sector. There was the only way to decrease the budget deficit. The government has borrowed a huge amount of money from the central bank to appropriate proceed for banking restructuring of IBRA(Indonesia Banking Restructuring Agency). The government borrowing from central bank means printing money, which is the most soft solution to raise public tax without tax resistance, but which can incur many difficult side-effects. Bank Restructuring O IMF Recommendations First, the IMF recommended the Indonesian authorities to merge the weak banks to strengthen the banking system. [ The authorities announced, December 31, 1997, the plan to merge four state- owned banks(Bapindo, Bank Dagang Negara, Bank Bumi Daya and Bank Exim) into one entity. This was followed by the announcement of several banks, in January 1998. Bank International Indonesia(BII), Bank Dagang Nasional Indonesia(BDNI), two of Indonesian largest private banks, have agreed to merge with three other smaller banks(The Meltdown of the Indonesian Economy in 1997-1998, causes and response, Anwar Nasution) ] Second, the IMF recommended the authorities to expand new injection of capital including foreigner for bad banks. Third, the Indonesian government established IBRA(Indonesian Bank Restructuring Agency), an independent agency under the Ministry of Finance, to implement overall banks restructuring according to IMF recommendation . The IBRA replaced Bank Indonesia’s position as the lender of last resort to itself. The central bank was in danger because it spent excessively for the expense of budget deficit. Fourth, the IMF recommended the Indonesian government to operate state- owned enterprises, including state-owned banks, more accountably and transparently. The evaluation of bank managers should be measured by performance contract to evade interference. The IBRA is mainly engaged in supervising distressed banks that need restructuring and managing restructuring process. Another important role of IBRA is to manage the assets required for banks restructuring process. The IBRA announced that it suspended 7 banks business operation, took 7 banks management and took control of 40banks(including 3 state-owned banks, 11 regional development banks, 26 private commercial banks) under IBRA’s supervision. The 3 state-owned banks were Bank Bumi Daya, Bank Pembanguan Daerah and Bank Dagang Negara. The IBRA depended on central bank for raising fund to implement banks restructuring process. Fifth, the IMF recommended that Bank Indonesia, the central bank, have full autonomy in formulating and implementing monetary policy. Sixth, the IMF required the Indonesian government to be equipped with a more practicable infrastructure, prudential rules and regulation, regarding the financial system. Its purpose is to strengthen the capability of Bank Indonesia to supervise banking industry and to enforce the prudential regulations. Seventh, the IMF recommended that the authorities explicitly provide full guarantee on deposits of all banks in Indonesia to restore confidence of domestic and international community on domestic banks. The policy was expected to help foreign banks in accepting the Indonesian bank’s Letter of Credit and to prevent bank run. O Bank Indonesian Bank-Restructuring Plans in August 1998 (EIU Country Report 4th quarter 1998) Recapitalization Bank Indonesia will decide which bank may gain capital from the government by a financial review of all banks and business plan of selected banks. The selected banks will receive new capital from the owner or other investors including the government. Government participation is temporary and its title of ownership is represented by IBRA. All bank obligations obtained from Bank Indonesia liquidity support will be transferred to IBRA, which then converts them into equity or subordinated loans. Improvement of rules and regulation These are amendments to the Banking Act of 1992, submitted to the parliament on August 4, 1998. Bank licensing, previously authorization with the Ministry of Finance, will be transferred to Bank Indonesia. Foreign investors may take bank’s share more easily. The IBRA will be operated at given legal basis. Improvement of prudential regulation Banks are required to meet the capital adequacy ratio of 4% by the end of 1998, 8% by the end of 1999 and 10% by the end of 2000. Stricter actions will be taken against owners and manager who violate regulations. State-owned banks Bank Exim, Bapindo, Bank Bumi Daya, Bank Dagang Negara and the corporate business of Bank Rakyat Indonesia are to be merged into one bank. Bank Rakyat Indonesia(BRI) will concentrate on small credit and retail banking to support small-scale enterprise and cooperatives. The non-performing loans of the BRI will be transferred to the Asset Management Unit(AMU) of IBRA. Suspended banks The assets of the seven banks suspended on April 4, 198 will be transferred to the AMU. Taken-over banks Of the seven banks, Bank Danamon, Bank Modern, Bank Umum Nasional, Bank BDNI, Bank PDFCI, Bank Tiara and Bank BCA, the operations of three(BDNI, Bank Umum Nasional and Bank Modern) will be suspended, while the other four will be retained by the government in order to restructure their capital. The owners of Bank BCA, Bank Danamon, Bank BDNI and Bank Umum Nasional wanted to provide fund and assets. The government set a condition that the funds and assets provided by the owners-founders must cover all credits to their groups and affiliates as well as BI liquidity support. The External Debt of the Private Sector Most of Latin-American countries announced moratorium for repayment of foreign debt in the early 1980’s. As a result, those countries could not have access to international financial market through 1980’s as a punishment from the international community. The repayment of foreign debt is very important because the international capital market remembers the borrower’s behavior for a long time. The total foreign debt was US$ 133.69billion in 1997, of which US$ 67.67billion was private sector’s foreign debt and much of them was short-term debt. The Indonesian government proposed to temporally freeze the paying private sector’s external debt. The basic principle of the government policy was not to interfere and to support repayment of private sector debt. The agreement among the representatives of government and private sector of Indonesia and the steering committee of foreign lenders was reached in June 1998. [The private sector’s external debt problem is to be solved based on a combination of Mexico’s Ficorca program and the Korean scheme. The Korean plan takes the short-term, non-trade debts of Indonesian banks(US$ 8.9billion) and restructures them into loans with one to four years maturity. The non-bank corporate external debt(US$58.79billion) will be rescheduled and restructured along the lines of the Mexican programs. A trust institution, called INDRA, is to be established by the government of Indonesia and administered by Bank Indonesia(The Meltdown of Indonesian Economy in 1997-1998: Causes and Responses, Anwar Nasution) ] The INDRA(Indonesian Debt Restructuring Agency) announced its 8 principles for solution of corporate debt. INDRA is an intermediary institution. Both the debtor & creditor must agree to its participation in INDRA. The government shall not assume the responsibility of commercial risk. The government does not take over and bail out the private sector debt. INDRA has to be self-financing, to avoid automatic granting of subsidies. The whole or part of the private debt is eligible for INDRA scheme. The objective of INDRA is to reduce the burden of short-term external debt repayment, which will support the balance of payments condition. INDRA scheme is designed to ease the short-term liquidity problem faced by the Indonesian firms. If any government assumes the private sector’s debt in place of the collapsed corporate, both the creditors and corporate will never learn lesson from their mistakes. It is understood that the principle of the Indonesian government is not to repay the private sectors’ foreign debt as a reasonable way. However its policies can be the most regretful thing in the near future because the strong countries to which the creditors belong decide the order of the international financial market. Reform of Bankruptcy Law One of the most notorious things for foreign creditors was the Indonesian bankruptcy legal system. The bankruptcy law focused on the protection of creditor’s right. In reality, the law lacked detailed enforcement measures and was doubtful of its practicability. [Though 90% of Indonesian listed corporates are in default, none of them went bankrupt. For example, the Peregrine securities in Hong Kong is in a liquidation process because Steady Safe, the Indonesian transportation company, announced default for US$ 350million debt from the Peregrine securities. But Steady Safe is engaging in its business as usual(The Economist, The living dead, on January 24, 1998)] These kinds of practice cause moral hazard of the borrower and bankruptcy of creditors, especially financial institutes. This issue is one of the main causes of the Indonesian financial crisis. Of course, the foreign creditors made a strong request to the Indonesian authorities for the reform of the bankruptcy law. The new bankruptcy law began to be effective after August 20, 1998. A fair treatment of creditors, whether domestic or foreign, is the leading principle of the new laws. No debtor can receive a discharge as a result of either suspension of the payment offer of a settlement or reorganization plan to his creditors unless he pays the amount of his debts in full or qualified majority must accept the plan. O Bankruptcy In the case of bankruptcy proceedings, the debtor’s assets are liquidated to pay the creditors claims according to the ranking of such claims. The court can declare a debtor bankruptcy on a summary finding that the debtor has at least two creditors and that at least one of the two debts is currently due and payable. The creditor should provide evidence that the debtor has caused to pay his debts. There is not any time limit for all debts to be the evidence of the bankruptcy. Unsecured creditors have no priority and will be paid, if any proceeds of the assets remain after all other creditors have received payment. They are required to present their claims to the court receiver. Secured creditors have the right to separate the collateral from the debtors asset and to enforce against the collateral. The secured creditors will only become involved in the bankruptcy proceedings if the value of the security is not enough to cover their claims. O Suspension of Payment This process offers the debtor temporary relief against the pressing creditors in order to reorganize and continue his business, and ultimately to satisfy the creditors claims. Suspension of payment can easily be converted into bankruptcy when it is clear the reorganization of the business will not be successful. On the other hand, the bankruptcy can not be converted into a suspension of payments. Yüklə 0,82 Mb. Dostları ilə paylaş:
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