Indonesia: Cash payments only

Jakarta, Jan 12 (IPS/Kafil Yamin) -- His publishing company has been getting its stationery supplies from the same firm for years, making payments through bank transfers. But being a loyal customer no longer allows Budiharjo's company that convenience. Now, it has to pay the supplier in cash.

Budiharjo says they have no choice. "If we don't pay in cash, our supplier refuses to send the stuff we need."

But if there are any hard feelings, they are directed toward the banking sector, hit by an acute liquidity crisis in an economy that shrank by 14 percent last year.

On the verge of collapse, state and private banks are unable to provide credit services, including letters of credit and credit transfers.

All the banks do these days is try to convince Indonesians to deposit money by offering astonishingly high interest rates. Until last November, the set interest rate on deposits was 62 percent. Today, it is at 40 percent, following the rupiah's recent rally against the US dollar.
But Indonesians are choosing to keep their money under their mattresses instead of putting them in the banks. Says Rahmadi, a sugar distributor who keeps a cash box in his office: "In this uncertain situation, I don't want to take any risk."

Rahmadi turns down any payment by cheque or credit transfer made by his customers. "Business dealings become inefficient," he admits. "But I (have to) do this."

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

"Without bank credit, how can we initiate productive activities?" asks economist Didik J Rachbini, who worries that export-oriented businesses will not grow. "That means we cannot generate state revenue, which is badly needed to help heal the economy."

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

Analysts say the situation has rendered them incapable of guessing how the economy will fare in the next few months. Says one expert: "No one would be smart enough to make predictions for even one month ahead."

Among the Asian countries hit by the financial crisis that began with the devaluation of the Thai baht in July 1997, Indonesia has suffered the biggest blows. Its banking sector is among the heaviest casualties of the crisis, with as much as 75% of total 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 with which they had corporate connections. But the Central Bank was always ready to help them avoid liquidity problems with injections of billions of rupiah.

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

He explains that authorities had looked the other way because most of the corporations served by the banks were those linked to Suharto's cronies and allies.

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

Then the crisis hit, and political turmoil soon followed. In a recent issue, the 'Asiaweek' newsmagazine declared: "Less than six banks in all of Indonesia...may actually have assets that exceed liabilities."

At least 70 of the remaining 166 local commercial banks will be incorporated in the recapitalisation programme. Banks with a CAR -- a risk weighted asset ratio -- of more than four percent will be
considered solvent and will not be in the programme.

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

In the budget, the government estimated of interest payments on the bonds at $4.3 billion, 53% of which would be drawn from the budget. The remaining 47% would come from the sale of non-performing loans of banks.

President Bacharuddin J Habibie has also proposed that about 2.25 billion dollars from the state budget be set aside for the bank recapitalisation programme -- the first time public money is being used to rescue sick banks.

The budget however calls a little less than that amount to be contributed by owners of 14 banks that the central bank helped survive in the 1998.

Still, many legislators are opposed to using public money to help the banks, saying the amount is too high for such an austere budget.

The proposal is expected to be defeated. Says legislator Budi Santoso of the ruling Golkar faction: "When we are supposed to tighten spending, the amount does not make sense."
The national budget, at 28.5 billion dollars, falls short of the amount needed for the banks' recovery. Although he agrees the government has no choice but to help the banks, Santoso notes that the Habibie government may be seen as favouring big business too much.
"When some 80 million poor people are in need of funds to survive, (Habibie) spends hundreds (sic) of billions of dollars to heal the banks," he observes. "What an uneasy position for him."

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

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

Fresh foreign capital, meanwhile, remains elusive because of political uncertainty.

High interest rates were supposed to lure in foreign funds. But as Jardine Flemming Nusantara Research director Rizal Bambang Prasetijo points out: "With high political risk, an interest rate of 25 or 50 percent makes no difference."