Up until recently, banks have been more willing to consider confirmation of short-term letters of credit (L/Cs) up to 90 days from around a dozen, mostly local banks operating in Indonesia.

Improved perceptions of risk

More favourable perceptions of Indonesian risk have been encouraged by Indonesia's plans for bank restructuring and economic reform and consequently pricing for L/C confirmation had been falling. Several western banks reported cheaper L/C pricing in mid-September when the IMF endorsed trade financiers' brighter perceptions with its approval of a US$398 million disbursement after completing a second review of its extended fund facility.

IMF support shapes perception of risk but once again, Jakarta is on course for confrontation with the international institution. In November, the country's powerful Bank Restructuring Agency (IBRA) announced that it might delay again the sale of stakes in Bank Central Asia (BCA) and Bank Niaga, two of the country's largest commercial banks.

L/C prices on the up

Under an agreement with the IMF, the government had pledged to sell shares in the two banks before the end of 2000. IBRA holds the controlling stakes in the banks. Previous delays on IMF reforms have unsettled the country's financial markets and, unsurprisingly, sources now report that L/C prices that had been falling are once more on the up.

While the prospect of delayed bank take sales jeopardises Indonesia's prospects for retaining support from the IMF and the market, there are however some encouraging signals from Jakarta. These include senior economics minister, Rizal Ramli's ambitious ten-point programme to accelerate economic recovery and IBRA chief Edwin Gerungan's announcement that the agency would review controversial debt restructuring deals with large debtors.

Commercial cover or red tape?

There are several implications in these mixed messages for traders and their financiers. Obviously, the heightening or lowering of perceptions of risk influences pricing.

This same process also affects the types of deals struck. According to local sources, banks had begun to provide moderately priced commercial cover albeit on sight to 90 day terms for commodities. Trades of oil and, to a lesser extent cotton and machinery have been seen.

Significantly lower perceptions of risk would stem the growth of such commercial cover and force traders and bankers into using the bureaucratic trade mechanisms designed in the aftermath of the Asian crisis. There is still limited availability under schemes such as those backed by credit agencies such as Australia's Export Finance and Insurance Agency and the US' Export-Import Bank.

But now that traders are once more getting used to the idea that commercial cover is available and the market has seen the annual price for confirmation fall from an average of about 5 per cent to 6 per cent in July to 3 per cent above Libor in September, who wants to return to such a long-winded way of doing business?

This article represents the views of the author and not necessarily those of the ICC or any of the other partners in DC-PRO.