The timing couldn't have been better. Now that international trade is being squeezed by a credit crunch caused by global financial turmoil, and the creditworthiness of many importers overseas has become questionable, the Indonesian government is strengthening its export-financing mechanism.
The first step towards this facility was the enactment by parliament on Tuesday of a law governing export financing agency (LPEI), the first time such a financial institution will be founded on a law.
Different from the state-owned Indonesian Export Bank (BEI), which lends only on the back of collateral, LPEI will be able to provide loans based on export transactions.
Similar to the Export-Import Bank of the United States, LPEI is mandated not only to finance exports of goods and services but also to provide insurance and credit guarantees to exporting firms.
After the financial turmoil broke out last September, it has become more difficult for exporters in Indonesia to get confirmed letters of credit (L/Cs) from importers in developed countries.
Domestic banks will not give loans to exporters if their export transactions are not fully covered by L/Cs that are confirmed by banks overseas.
The new agency, which will take over BEI, will not compete but supplement the trade financing operations of commercial banks, whose lending operations are strictly regulated by the central bank (Bank Indonesia). LPEI will thus fill in the gaps in trade financing.
Export financing is a crucial component of international commerce. In the old days, trade financing was arranged mostly between trading houses and finance institutions either in the form of L/Cs, cash with order, cash against shipping document or an open account.
However, prudential regulations do not provide broad leeway for commercial banks to assume all the risks related to lending for the export trade.
But LPEI is able to assume credit and insurance risks other lenders are not able or unwilling to accept, due to prudential regulations. This facility will especially benefit small and medium enterprise (SME) exporters which are often shunned by commercial banks.
Operating with an initial capital of Rp 4 trillion (US$375 million), LPEI will therefore increase the availability of trade financing and will be able to help SMEs and export merchants which mostly cannot put up collateral for loans.
However, as a specialized financial service company which must fund its operations with its own revenue, LPEI should devote resources to assessing risks associated with international trade, based on information it gathers from various markets and buyers overseas.
LPEI will also be able to provide a wide variety of trade financing and this facility fits the needs of exporting companies -- export merchants and exporter-manufacturers (producers).
Exporter-manufacturers need credit at a pre-shipment stage to allow them to procure raw materials, cover their processing costs and pay for packing, freight and insurance for export operations. In the case of exporters of services such as construction contractors, they need financing at pre-tender and post-tender stages.
Put another way, LPEI should be able to meet the different needs of exporters and assess their different business risks inherent in the range of products they export.
Given its broad mandate and big mission, LPEI is authorized by the law to raise additional operational funds from multilateral agencies such as the World Bank and Asian Development Bank, foreign governments, Bank Indonesia and domestic and foreign finance companies.
But again, all in all, financing is only one aspect, albeit a crucial one, of export operations. In fact, in the case of our exporter-manufacturers, their operations involve a wide range of cross-sectoral activities: imports of basic materials, port handling, transportation to processing plants, and shipment. Any hurdle encountered in any one link of this chain could adversely affect the competitiveness of exports due either to delayed delivery or higher costs.
Given the sharp downturn in the global economy and the huge excess in the manufacturing capacity of other countries, especially such major exporters as China, India, Japan and South Korea, it is imperative for the government to improve its inter-ministerial coordination in strengthening the competitiveness of our exports and in diversifying the markets of our exports.
