BizCLIR

In Indonesia, cross-border transactions reflect a significant amount of monetary exchange. Over $186.4 billion in goods and services were traded in 2006. Net FDI inflows amounted to $7.5 billion in 2006, down from $8.5 billion in 2005. Trade financing is fundamental to this flow of international commerce. A sophisticated set of mechanisms and tools has been created to facilitate the exchange of goods and services internationally. Many trade finance products and services, prior to the Asian financial crisis in 1997–1998, were increasingly available from a network of financial service providers in Indonesia.

In the mid 1990s, the Indonesia banking sector, including both private and state-owned institutions, possessed an established network of international correspondent relationships and traditional instruments to support trade flows. Hedging instruments, though widely used around the globe, were often ignored in Indonesia. Indonesian importers and exporters had access to a wide variety of trade-financing options, including import letters of credit, pre-shipment working capital loans, and post-shipment refinancing. Strong inter-bank lines of credit supported these instruments. Indonesian banks and corporations also had access to a large number of direct and derivative financial instruments designed to help cover foreign exchange risk, but these were often not used either. With the rupiah under a managed float, both borrowers and lenders believed that hedging their exposure was unnecessary.

Although access to trade-finance products was relatively advanced for the region in the years leading up to the financial crisis of 1997–1998, two factors still constrained trade financing in Indonesia. First, the banking sector was the primary source of trade finance and costs were relatively high. This often priced many small and medium-size enterprises out of the market. Second, Indonesia had developed few of the non-bank financial instruments for financing trade that are available in other, more developed countries.

The crisis of 1997–1998 damaged the development of Indonesia’s trade finance system. Many of the financial products that had previously been available were either viewed as too risky or too expensive by banks and other financial institutions in the wake of the crisis. In addition, the cost of financing was prohibitive and there was a lack of non-bank financial instruments.

In a modern economy, adequate access to credit and foreign exchange are essential to efficient and secure trade. Poor access to credit for domestic traders impedes start-ups and slows expansion. Indonesian laws and public and private institutions generally support both access to credit and trade-related money flows. Basic trade finance products are becoming more widely available to traders, although the availability of these products has not returned to pre-crisis levels. Foreign currency exchange is also broadly available, and all traders fine it fairly easily to exchange.

Despite this progress, Indonesia must deepen its bank and non-bank trade related financial instruments. If more institutions offered these products, inter-institution competition would reduce their cost to trade financiers and could dramatically increase usage among small and medium-size enterprises. It is equally as important to increase the volume of long-term credits that are very difficult to find due to market volatility and poor corporate balance sheets.