INDONESIA'S PROBLEM OF BANK CREDITS (ASSISTANCE)

Mr Zainul Abidin Rasheed asked the Prime Minister how he sees the chances of his proposal to assist Indonesia in alleviating the problem of bank credits taking off and how this proposal will complement that initiated by Malaysia for trading in regional currencies.

The Deputy Prime Minister (BG Lee Hsien Loong): Mr Speaker, Sir, with your permission, I will answer Question Nos. 1 to 5 together.

Mr Speaker: Yes.

BG Lee Hsien Loong: Indonesia's economic prospects remain cloudy. According to official Indonesian estimates, the number of unemployed may rise to more than 8 million in 1998. The drastic fall in the rupiah has pushed up the prices of food and basic necessities, making them unaffordable to many Indonesians. This has triggered riots in towns in Java and other islands. Provision shops have been destroyed.

The Indonesian government has taken many steps to stabilise the situation. It committed itself in January to implementing a comprehensive IMF programme. It has organised Indonesian companies to discuss with lenders how to resolve the private sector debt problems, which the companies would otherwise be unable to repay. Unfortunately, confidence has not returned, and the exchange rate has not recovered.

Indonesia is now considering implementing a currency board system in the hope that it will stabilise the rupiah. The IMF and the World Bank have advised Indonesia that it does not yet have the preconditions to do so. The markets are waiting to see what Indonesia will decide.

The IMF, the World Bank, and many countries, including the United States, Japan and Australia, have been discussing how they can help Indonesia along its difficult path towards economic recovery, and alleviate the hardship and social pain the crisis is causing.

Singapore will continue to help Indonesia within the limits of our ability. We are working with Indonesia's friends in the region and worldwide. Our US$5 billion loan arrangement with Indonesia still stands. The loan is structured as a back-up credit, to supplement the IMF programme.

We have also helped to work out a guarantee scheme for Indonesian imports. The currency crisis in Indonesia has substantially increased the risks of financing Indonesian trade. Major foreign banks will no longer provide trade financing for Indonesian firms. It has become almost impossible for Indonesian firms to import essential goods, or raw materials and components for their export industries.

The proposed guarantee facility is to give confidence to foreign banks to accept letters of credit of Indonesian banks. Under the scheme, central banks from a number of countries will jointly counter-guarantee the guarantees made by Bank Indonesia, which is Indonesia's Central Bank, on letters of credit opened by trade financing banks. The participating countries will cover only sovereign risk, and not commercial risk. It will be a scheme to assure the foreign banks that Bank Indonesia will honour its own guarantees. All corporate risks will continue to be the responsibility of the foreign banks themselves. The scheme will operate for at most two years.

MAS will pledge up to US$2 billion towards the guarantee facility. This amount will come from its existing commitment of US$5 billion for the second tier IMF credit facility for Indonesia. No additional funds need to be committed. Our exposure under the counter-guarantee will be proportional to our contribution to the facility.

We are still in discussions on the scheme with several countries. It will proceed only if enough countries agree to participate, including the major G-7 countries. The IMF and World Bank have to support the scheme.

The multi-lateral trade guarantee scheme is not related to the Malaysian proposal to use regional currencies to finance regional trade. The former, the trade guarantee scheme, is a short-term measure to overcome the unwillingness of foreign banks to finance trade with Indonesia. The latter, the Malaysian proposal, attempts to address the longer-term issue of limiting the exposure of trade to currency fluctuations.

The events in Indonesia will have a profound impact on the entire region. They have been extensively reported and analysed in the media. Ministers have made many speeches explaining the situation and its significance for Singapore. Members who follow the media reports will have a good overview of developments. When Members raise specific questions, the Government will provide the House with the information it has.

Mr Zulkifli Bin Baharudin (Nominated Member): Mr Speaker, Sir, I would like to ask the Deputy Prime Minister, in view of IMF's opposition to Indonesia's plan for a currency board and threats of withdrawal of IMF funding should Indonesia proceed with the plan, would the Singapore Government similarly withdraw or what would be its position on the US$5 billion stand-by credit to Indonesia?

BG Lee Hsien Loong: Mr Speaker, Sir, the US$5 billion stand-by credit is a second line credit. As has been explained in this House by Dr Hu, it stands behind the IMF commitment and is conditional on Indonesia following an IMF programme. It will only be drawn down, first, if Bank Indonesia exhausts its own reserves and, second, if Indonesia then draws upon the IMF-provided line of credit, which is about US$20 billion, and if that is still insufficient, then we are really third in line. So it is conditional on the IMF programme and therefore the situation envisaged by the Member is unlikely to arise.

Mr Chng Hee Kok (East Coast): Mr Speaker, Sir, the sovereign guarantee of Indonesian exports is a last resort guarantee. How is this limited only to sovereign risks? Maybe the Deputy Prime Minister will like to explain a little more on how this is limited to sovereign risks.

BG Lee Hsien Loong: The scheme is like this. If an Indonesian company wants to import something, raw materials, food, it goes to an Indonesian bank and gets a letter of credit. Normally, that would be sufficient for it to do business. But under present circumstances, many foreign banks are uncertain about the credit status of Indonesian banks and will not accept this letter of credit. So they take this letter to Bank Indonesia, the Indonesian Central Bank, and get the Central Bank to reconfirm it. That means the Central Bank will answer for the letter of credit. Under normal circumstances, that would be sufficient. Because it is Bank Indonesia guaranteeing it and if Bank Indonesia says, "No. I can't pay", then it is sovereign risk if the country is in default, which is a very grave matter. But under present circumstances, even with Bank Indonesia's endorsement, foreign banks are still reluctant to accept the letter of credit and therefore the trade cannot flow.

The proposal is for this trade financing scheme to counter-guarantee the Indonesian Central Bank's guarantee so that if the Indonesian Central Bank is unable to cover, then only will it fall back on the other central banks. In other words, it is a back-up line. But it has not proceeded. As the Prime Minister has said, it is still a concept because the countries who might participate are waiting to see if Indonesia proceeds with the currency board and whether there will still be a central bank to counter-guarantee the credits.

Mr Leong Horn Kee (Bishan-Toa Payoh): May I ask the Deputy Prime Minister to confirm whether there has actually been a draw down as yet on the US$5 billion. If not, what is the schedule that he expects it to happen? Also, would there be pressure on the Government, in case this US$5 billion is fully drawn down, that they need to consider further financing for the Indonesians?

BG Lee Hsien Loong: The US$5 billion has not been drawn down at all. The arrangement is that when Indonesia needs to call on the loan, they will give us notice and draw down in reasonable tranches, but they have not yet done so. So the second question on what happens if it runs out is hypothetical.

Mr Zainul Abidin Rasheed (Cheng San): Mr Speaker, Sir, may I ask the Deputy Prime Minister to elaborate, in the light of the uncertainty about the economic crisis in Indonesia and the uncertainty related to the mechanism that will be applied, including the question of the currency board and IMF package, whether there is continuing dialogue and consultation between the Indonesian authorities and Singapore and, if not, whether there is a need for a machinery to ensure that there is proper understanding between our offer and conditions.

BG Lee Hsien Loong: We are in close contact with the Indonesian government. He can be sure that our Ambassador in Jakarta is a very busy man right now. But the Indonesian government has many preoccupations and the trade guarantee is only one of them.

Mr J. B. Jeyaretnam (Nominated Member): May I ask the Deputy Prime Minister not just one question, but three questions. First of all, I am not quite clear as to whether he has stated what is the Singapore Government's stand on this proposal to set up a currency board. What is the Government's view on it? Does it support the proposal or does it oppose such a set-up of a currency board? May we know from the Deputy Prime Minister about that?

The second question is, as I have understood it, this guarantee is to be given by the central banks of the other countries. In Singapore, who would that be in giving the guarantee? Would public funds be tied up in any guarantee given?

Thirdly, has any decision been taken, if other countries participate in this scheme, for Singapore to give such a guarantee? I know there is a Question on whether the President's approval will be sought. May I know whether it is the intention to seek the approval of Parliament before any guarantee is given?

BG Lee Hsien Loong: Mr Speaker, Sir, the question of whether Indonesia should or should not have a currency board is one which is for the Indonesian government to decide.

Mr Jeyaretnam: What are the Singapore Government's views?

BG Lee Hsien Loong: We do not go round telling other people how to run their country. We are busy enough running our own.

The Prime Minister has stated that there are certain preconditions which a currency board requires in order to have a good chance of success. These have been reported in the newspapers. You must have adequate reserves, there must be confidence, your interest rates should not be too high and you must have a strong banking system. It is the state of these preconditions which I think has caused the IMF to have some reservations as to whether this is the right time to proceed. But finally, these are sovereign judgments which the governments have to make, and in this case, the government of Indonesia has to make. So we will have to wait and see what they decide.

As for the guarantee by the central bank, in Singapore, the Monetary Authority of Singapore is de facto the central bank and if we participate, the guarantee will be given by the Monetary Authority of Singapore.

Will these be public funds? Yes, of course, the Government has no private funds.

Will we go to the President? That is the question which we will answer because Mr Simon Tay has asked.

Mr Jeyaretnam: It is Parliament's approval I am asking.

BG Lee Hsien Loong: If the law requires us, we will come to Parliament. If not, we will act within our powers.

On the decision whether Singapore will give such a guarantee if others participate, as I have explained, this is a matter which is still a concept, because the others are now waiting to see how the currency board issue will develop, what the outcome will be, and whether there will be a central bank if a currency board is set up which will guarantee the letters of credit with whom we can deal. If not, the scheme will be unable to proceed. If the scheme can proceed and other countries agree, and since we have suggested it, I think there is a good likelihood that we will participate as well.

Mr Zulkifli bin Baharudin: Sir, there have been efforts by a private sector led consortium to restructure debts owed to Singapore banks by Indonesian companies. I would like to ask the Deputy Prime Minister what is the progress and status of this and whether it is timely for the Singapore Government and other governments in the region to play a more facilitating role to help solve this problem.

BG Lee Hsien Loong: A private consortium to restructure debts is a private consortium. So it is up to them to work out an arrangement which is acceptable to both the lenders and the borrowers in order to turn over the debts and share the burden of any losses. I do not know what the latest status is. I do not think they have resolved the problem yet.

Since the Government's role in this is limited, we hope the countries whose institutions have lent large amounts of money to Indonesia, like Japan, or the countries which have major influence on the international financial system like America, will exercise their influence over their bankers to play a constructive role and to get together to solve this problem, instead of running for the exit all at the same time and therefore all panicking and getting nothing back. We can encourage them to do it, but it is for them to decide.

I would say that it is not easy for a debtor/creditor forum to succeed in the case of Indonesia compared to Korea. Because in the case of Korea, a lot of the money are debts to the banks and the banks are relatively few and it is easy for the Korean government to know who they are dealing with and which are sound and which are not sound, and where they can step in and give assurances. In the case of Indonesia, a lot of the debts are non-bank debts and here the range is much greater and there is a severe moral hazard if the Indonesian government comes in to say, "Well, this is a private company. It borrows money. Events have turned out adversely and the government will bail it out." The Indonesian government has said that it will not do this and this makes it harder, and there are so many more parties. So I do not foresee a quick resolution to the problem.

Mr Jeyaretnam: Mr Speaker, Sir, the Deputy Prime Minister says that Singapore does not tell other governments how to run their own business. I hope that it is followed by other Ministers as well. But leaving that aside, I do not understand why if Singapore is going to help Indonesia, what is the sensitivity or the reluctance to state Singapore's views on something that Indonesia is planning to do? It is not telling them how to run their country, but to give them our advice. May we know what Singapore's advice is?

Secondly, the Deputy Prime Minister says if it is the law, we will come to Parliament. May I ask him: what is the law? Because we had an opinion from the Attorney-General when I asked a question about the loan. So what is the law?

BG Lee Hsien Loong: Mr Speaker, Sir, if what Mr Jeyaretnam says is true, we would not need a Foreign Ministry; only a newspaper to publish our views. There are many dialogues, discussions, consultations between us and other governments, some are sensitive, some are top secret, some we can discuss more openly, some we publish in communiques. Not everything is put out in a communique and we do not express all our views publicly.

As for the law, we have verified the position and we have the powers under the MAS Act to give the guarantee and there is no requirement to come to Parliament.

Mr Chng Hee Kok: Mr Speaker, Sir, without naming the countries, maybe the Deputy Prime Minister will like to indicate how many countries are likely to participate in this counter guarantee scheme?

BG Lee Hsien Loong: Mr Speaker, Sir, I think you will need half a dozen or a dozen in order to make it worth while. But as I have stated, none have committed because all are waiting to see what will happen.

Mr Jeyaretnam: I am sorry to have to come back to this question about parliamentary approval. The Deputy Prime Minister now says that under the present law, it is not necessary. But does he not think that it runs completely counter to the opinion of the Attorney-General which was read out to this House by the Minister for Law on the question of the loan? We were told then that it was only for a guarantee that approval was needed.

BG Lee Hsien Loong: Mr Speaker, Sir, I am not a lawyer, but Article 144 pertains to the giving of guarantee by the Government. In this case, the guarantee will be given by the Monetary Authority of Singapore and Article 144 does not apply. A different Article applies and it does not require the President's approval.