Insight: Financial recovery may take time, despite bailouts

Manggi Habir, The Jakarta Post, Jakarta 

Two weeks ago, the U.S. financial crisis went global in a big way. For the average man living on Jl. Sudirman (in Central Jakarta), the drying up of money markets was only a peripheral phenomenon as news came in of far away global banks going bankrupt, being bought out by governments or allowed to reinvent themselves through mergers and management shake-ups. 

But plain to see were the tumbling of global share prices, including on the Jakarta IDX, and the concurrent weakening of currencies as foreign investors brought their funds home. 

Last week, share prices in free fall were arrested, only for them to land in choppy waters. 

The sweeping announcements of several government bailout packages, commitments to recapitalize banks, inject liquidity into interbank markets, cut interest rates and guarantee bank liabilities across the globe, were just enough to ease the panic and calm the markets. 

However, there is growing realization and concern that what we have witnessed of late is merely the beginning of a long-term crisis. 

This realization was brought home when leaders from the U.S. and Europe announced over the weekend the need for a global summit before the end of the year to be attended by the developed and developing worlds to address the global financial crisis. 

It is time multilateral agencies, such as the International Monetary Fund (IMF) and the World Bank, began playing a more decisive leadership role in coordinating global efforts. 

But now that we have gotten over the panic, what can we expect next? Perhaps, our own experience back in 1998 can shed some light on what is to come. The next phase is to ensure that the banking system is prepared for tougher times ahead. 

In the developed world, heavily exposed banks are usually rationalized though mergers or government buyouts. 

But there could be delayed problems with some banks that require injections of capital as in the case of Indonesia a decade ago. For Indonesian banks, the current problem is one of tight liquidity in the interbank markets, which ultimately raises borrowing costs and slows lending. There is also the tightening up of foreign bank trade facilities, resulting in slower trade. Both point to slower economic activities. 

This will eventually hurt loan quality and banks must ensure there are sufficient provisions and levels of capital. 

The government has already scaled down its 2009 growth target from 6.1 percent to 5.5 percent, but some feel we could return to the slow and muddling 4-5 percent range we experienced after the 1998 crisis. 

It is possible that many weaker Indonesian banks will be absorbed by stronger ones. 

But with foreign banks showing interest in the Indonesian market, it is likely outside money will come in to prop up the Indonesian banking market, rather than for banks here to consolidate themselves. 

Interestingly, ongoing discussions on this are receiving more attention. 

We should also expect rationalization to extend to the real sector. During the 1998 crisis, our diversified and often unwieldy Indonesian conglomerates became much more streamlined, with many choosing to focus on natural resource businesses, while shedding away unrelated businesses to pare down their loans. 

In the U.S., companies will be under similar pressure as exemplified by recent talks between GM and Chrysler. In Indonesia, the politically connected Bakrie group is also trying to settle its debts by selling some of its prized assets. In conclusion, we will have to learn to live with less debt. 

So how long will all this take? Again, our past experience shows the bank restructuring process lasted two years and it was another three years before the banks actually started to lend again; So, a total of five years. 

Indonesia also went through a political upheaval as well. The country moved from an authoritarian regime, under President Soeharto, to a messier, but more democratic regime, which has seen three popularly elected presidents preside over a period of eight years. 

Assuming the world's developed economies have the institutions in place to better facilitate an economic recovery, the recovery time should be much shorter. But we are still talking about two to three years. 

In the meantime, the upcoming global summit has much to discuss. No doubt, there will be much analysis on the world's current financial architecture and the need for an overhaul. 

There is much talk now on what should be the proper roles of governments and markets? And, in a globalized world, what is the preferred role of multilateral institutions? 

However, on a more practical level, improvements should be made to monitoring systems and measures should be taken to implement an early warning system that accurately differentiates between what constitutes a bubble compared to a legitimate rise in value due to innovation. 

And, given the global nature of these crises, there is the added complexity of devising a coordinated global solution that is acceptable to everyone. 

But one thing that should be made clear is that a recession is a natural and inevitable event in an economic cycle. It cleans up the clutter in our economy by punishing those that acted recklessly, although, admittedly, it can be quite brutal. 

Recession also brings inflated prices down to normal levels as exemplified by the drop in commodity prices, including oil. Perhaps a government's role is not to prevent recession, but to manage it properly, so that most innocent bystanders are spared. 

The writer is a financial and business analyst and a lecturer at Tarumanegara University in West Jakarta.

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