Indonesia Crisis Due To Unwise Pvt Borrowings

The financial crisis in Indonesia emanated from unwise international private borrowing and lending through the banking system.

In recent years, international lenders were anxious to syndicate short-term dollar loans of Indonesian borrowers, I Putu Gede Ary Suta, chairman, Indonesian Capital Market Supervisory Agency, said.

A world-wide lack of transparency in bank operations permits unwise lending and borrowing to go unchecked.

Money was given to companies despite the fact that these companies did not have sufficient income in foreign currencies to repay such loans, he said. According to Ary Suta, half of the trading on the Jakarta Stock Exchange was dominated by foreign investors.

 

In April 1997, four months before the rupiah was allowed to float freely, foreign participation had fallen to 40 per cent.

The reduction in foreign participation coincided with international investors beginning to express serious reservations regarding the economic situation in Thailand.

The reduction in new foreign investment in Indonesia was more than offset by domestic investment. Stock prices fell 35 per cent thereafter.

The main reason for a further fall in stock prices was the primary market where the new equity issues increased 41.8 per cent over 1996, he said.

He explained that extremely tight credit in the banking sector forced companies to enter the primary equity market for liquidity. Indonesian rules on preemptive rights provided incentives for investors in public companies to take up rights issues, even as stock prices fell, he added.