G-20 Should Agree on IMF Crisis Fund in November, Pangestu Says

Tuesday, 14 September 2010

The Jakarta Globe

Jakarta. An International Monetary Fund safety net that emerging nations can draw on in a financial crisis to stem capital outflows should be agreed by the Group of 20 nations in November, Indonesia’s Minister of Trade Mari Elka Pangestu said.

Learning from the 1997 Asian financial crisis, when hundreds of Indonesian companies and banks become insolvent, the country turned to Japan, Australia, the World Bank and the Asian Development Bank for around $5 billion of backup capital to support its economy after Lehman Brothers collapsed in 2008, she said in a Bloomberg interview.

South Korea is leading the push for the Washington-based lender to provide emerging economies with additional global loan facilities that would stem the type of capital shortages created by the global financial crisis. Pangestu said she hopes the G-20 summit in Seoul in November will agree to set up the safety net which should allow countries with healthy economies to avoid contagion from a financial crisis elsewhere.

“This idea of a global safety net came out of that experience,” Pangestu said at the World Economic Forum’s Summer Davos meeting in China’s port city of Tianjin. “You don’t want to do the normal IMF program, because you are not actually in trouble, it’s just confidence.”

Countries should be able to use the money for budgetary and balance of payments purposes, and the funds shouldn’t be subject to stringent conditions, she said.

Preventing Crises

The IMF last month approved the expansion of its Flexible Credit Line program established in 2008 to encourage countries with sound public finances to turn to the organization before crises develop. So far, only Mexico, Poland and Colombia have used the facility since it was set up.

Indonesia weathered last year’s global recession better than its Southeast Asian neighbors as it increased deposit insurance and strengthened bank supervision, the World Bank said last year. The country’s $540 billion economy will grow by 6 percent this year, up from 4.5 percent in 2009, the IMF forecast in April.

Southeast Asia’s biggest economy was forced to seek a $43 billion IMF bailout during the 1997-1998 Asian crisis as the rupiah slumped, companies defaulted on debt and 83 banks failed or were nationalized. The nation’s currency plunged 85 percent against the dollar from July 4, 1997, to June 17, 1998, after turmoil spread to the country from debt-ridden Thailand.

Following that experience, Indonesian officials in 2008 cut short holidays marking the end of Ramadan to restore confidence in the banking system after Lehman’s collapse, meeting with bankers, analysts and the public, Pangestu said.

Safeguard Confidence

“Even though we had done all the right things — we had done the reforms, we had macro stability — as soon as there was capital outflow, whether you like or not, the first order of the day — because we went through a financial crisis in 1997 — was to safeguard confidence in your banking system,” she said. “We had to do a lot to shore up the confidence.”

During the 1997 crisis, Indonesia took advice from a range of officials, including United States Treasury Secretary Timothy F. Geithner and President Barack Obama’s top economic adviser Larry Summers, both of whom worked at the US Department of Treasury at the time, she said.

While the first recommendation was to close down small banks comprising only 3 percent of the financial system, Pangestu said, this caused a crisis of confidence that led to a run on the nation’s major banks.

“They told us no, do not bail out banks, moral hazard, tighten budget, do not do stimulus,” she said. “It was only in retrospect when they did all the analysis that it was all the wrong advice. Now with the financial crisis in the US they did all the opposite that they told us in the past.”