Finance scheme offers Indonesia concrete help

The scheme, announced by Singapore Prime Minister Goh Chok Tong on Thursday, will be financed by at least US$2 billion of Singapore money originally pledged for the International Monetary Fund's $43 billion rescue package for Jakarta.

Goh has given few details of the scheme and his spokesman told Reuters on Friday the terms would be announced next week.

But economists said the basic outline was already clear and the plan would be of enormous help to Indonesian firms paralysed by the devaluation of the Indonesian rupiah in recent months.

``It will have a real impact on Indonesian companies,'' said Kaan Quan Hon, Director of Economic Research at DBS Securities.

``There will be more liquidity and needed imports can start to flow back and get the manufacturing process going again.''

The Singapore plan is designed to restore confidence in the ability of Indonesian companies to pay for essential imports.

This confidence has been shaken in the last nine months by the crash of the rupiah against the US dollar, which has wiped out about 70 percent of its value and made many Indonesian companies technically bankrupt.

As a result, Indonesian firms have found it difficult to get letters of credit (LCs) accepted by international suppliers, hampering the import of raw materials for manufacturers.

LCs are guarantees provided by a bank saying a company has enough funds to cover a transaction. If the deal goes wrong, or the party providing the LC goes under, the bank will pay up.

But the system breaks down if customers think the bank may be unable to come up with the money if needed.

Economists say the scheme would allow Indonesian banks to issue some LCs for goods to be imported from Singapore, or via Singapore, with special backing from a Singapore bank. This would guarantee the Indonesian bank's credit-worthiness.

``The Singapore scheme is meant to facilitate LCs issued by Indonesian banks so they would be cleared and recognised here,'' said Daniel Lian, head of Asian markets research at ANZ Bank.

The scheme would help Singapore companies, many of whom have lost valuable Indonesian customers because of the crisis.

Singapore is an important supplier to Indonesia and much of the country's raw materials are transhipped through its port.

Indonesian data show Jakarta last year imported $3 billion of goods from Singapore, over seven percent of its imports.

Goh originally proposed a multilateral LC guarantee system and said $8 billion worth of backing should be achievable.

He wrote to all the Group of Seven (G7) countries -- the United States, Canada, Japan, Britain, France, Italy and Germany -- and China, Australia, Brunei, Malaysia and the Netherlands, asking for their views, Singapore said earlier this month.

But the proposal appears to have been politely rebuffed.

Many Western countries are reluctant to get involved in any scheme to support Indonesia until it complies fully with its agreements with the IMF on economic restructuring.

Goh said on Thursday the G7 countries had not shown much interest in the idea and preferred their own financing schemes.

Economists say multilateral trade financing would be more effective than a bilateral system but say the Singapore plan would be a useful model. Other countries could also join the scheme, they said.

``It is a good idea,'' Lian said. ``In the longer term, Indonesian debt has to be rolled over and restructured. For the moment, the LC scheme will bring in some necessary imports.''