Signs of a revival in letter of credit (L/C) business are beginning to show in one of Asia's more fragile markets. Margins on Indonesian trade paper have over the last year slimmed from as much as 6 per cent to as low as 3 per cent. Nevertheless, only around 20 per cent of imports are currently financed by L/Cs. Rather more exporters still require the certainty of cash in advance for goods and services while very few Indonesian buyers are afforded the comfort of open account terms.

Indonesia's recovery has been hindered by internal and external factors. Embattled leader Abdurrahman Wahid must deal with social unrest as he and the central bank governor Sjahril Sabirin face corruption charges. A tumbling US economy threatens Indonesian exports to the US while higher oil prices and a weak currency make the implementation of much needed reforms difficult.

Bankers are keeping a close eye on reforms in the wider economy and government moves to protect the beleaguered rupiah. This year the government has already announced it intends to buy back more than 100 trillion rupiah bank recapitalisation bonds over a three year period to stave off a potential fiscal catastrophe when the bonds start to mature in 2004. Meanwhile, Bank Indonesia has issued new rules to protect the rupiah, including a cut in the amount of offshore lending of the rupiah by Indonesian banks.

The banking system itself is in the early stages of a radical restructuring programme that aims to rid the sector of its legacy of unreliability and corruption. The government intends selling 20 per cent of its stake in PT Bank Niaga, perhaps in May if investors are satisfied with due diligence planned for April.

Bank Niaga is one of several local banks taken over by the government following the government's recapitalisation of the banking sector in 1999. The government also plans to sell its stake in PT Bank Central Asia. Both divestments would help finance the state budget.

Bank Mandiri is now expected to float 30 percent of its shares, double the stake announced in November 2000. Proceeds would help the bank finance the repayment of US$560 million in foreign debt that matures this year.

The Indonesian Bank Restructuring Agency (IBRA), the government agency established to realise change in the banking sector, has also said it plans to finish the debt restructuring process for 90 percent of its 50 largest groups of debtors by the end of 2001.

The net result of the reforms so far is that Standard Chartered, for example, now says it would look at doing business with more than a dozen local banks. Bankers in the US and Europe are generally more sceptical. Some consider local banks such as Bank Mandiri and Bank Negara safe institutions, but there is no universal agreement on this.

Other local banks are not considered so safe. Analysts suggest Bank International Indonesia and Bank Universal will need fresh capital to invest in technologies to keep pace with international banking standards. The two banks are considered vulnerable to potential defaults from corporate borrowers burdened by high interest rates.

Support from the World Bank and the International Monetary Fund (IMF) plays a crucial role in Indonesia's reform process. On 31 January the World Bank announced the approval new annual loans of about US$400 million to Indonesia over the next three years. But as well as providing technical and financial support, the multilateral institutions' views on progress in the reform process help shape perceptions of Indonesian risk.

Not for the first time, the IMF is looking for faster progress from the IBRA. Speaking at a press conference in February, IMF director of external relations, Thomas Dawson, pointed to a number of issues outstanding:

"We have talked with the Indonesian authorities and given them our counsel on the importance of preserving the independence of the Central Bank, Bank Indonesia, and we've made a number of recommendations on how its accountability and transparency could be strengthened, which is something they're concerned about, building on the 1999 bank law but without compromising its independence," he said.

"We are waiting for agreed safeguards in fiscal decentralisation to be implemented, and among the financial issues, we're awaiting a number of actions surrounding IBRA's asset recovery and restructuring program," Dawson concluded.