INDONESIA: Debt deal requires stability to work
By Peter Montagnon and Sander Thoenes in Jakarta
The agreement yesterday between Indonesia and its bank creditors over the refinancing of some $80bn in private sector debt is a remarkable coup for the new administration of President B.J. Habibie.
But whether Mr Habibie will be able to turn the achievement to his political advantage is another matter, as is the question of how smoothly the deal will work in practice. While Indonesian economists generally welcomed the agreement, they were also cautious about how effective it would be in reviving a corporate sector that is tottering under a mountain of debt and a slump in domestic demand.
In theory the deal provides a break for Indonesia in three different ways. First the banks have undertaken to restore vital lines of trade finance.
Second, short-term interbank debt is to be refinanced over a period of up to four years. This will relieve Indonesia of the need to repay $9bn in debt this year, said Ginanjar Kartasasmita, Mr Habibie's chief economic minister and architect of the new government's recovery strategy.
Third, a mechanism has been created in the new Indonesian Debt Restructuring Agency for helping companies rendered unable to service foreign debt by the massive devaluation of the rupiah. The agency will not have to make any principal repayments in dollars for three years. That also brings a short-run boost to Indonesia's foreign exchange cash flow that should help revive the currency and revive confidence.
It is only when one starts to consider the small print that the difficulties come through. Without strong domestic banks prepared to open letters of credit, it is not clear whether Indonesian companies will be able to benefit from the increase in trade finance. The refinancing of interbank debt must be agreed by all creditor banks which could prove a struggle, though a similar deal worked in the case of South Korea.
The corporate debt scheme also fails to bring the generous foreign exchange guarantee that many companies and some banks had hoped for - the government will only guarantee the best market rate prevailing for a period after it is implemented.
Companies must continue to pay interest and principal in rupiah to the restructuring agency which will then take care of finding the dollars to pay foreign banks.
- Not many companies will be able to pay even interest, said William Keeling of Dresdner Kleinwort Benson. The deal does not cover commonly traded derivatives such as debt swaps.
One risk, bankers say, is that the scheme will prove attractive only to the worst quality companies. Given the corrupt record of Indonesian public entities, companies may then try to persuade the restructuring agency to make dollar payments on their behalf even when they are actually in default. The agency's management will have to be very tough.
In the short run, the impact on financial market confidence may be what matters most. With new loans flowing again from the World Bank and the International Monetary Fund now preparing to resume its programme, there has at last been some good news.
FT-leader INDONESIA: Debt deal announced
The agreement to reschedule Indonesian private debt, announced last Thursday, is good news because it provides a breathing space. This must now be used to push on with economic restructuring, stabilise the economy and smooth the transition to a legitimate, democratically elected government.
The deal on the $80bn owed by the private sector will help Indonesia in three ways. It should restore trade finance; it will refinance short-term, inter-bank debt for up to four years, thereby removing the need to repay $9bn this year; and it will assist companies currently prevented from servicing their foreign debts by the collapsed currency and collapsing economy.
What is more, all this has been achieved without undue involvement by the government. On the non-bank debt, the government has merely promised to provide foreign exchange at "the best real 20-day average market rate occurring from the date the programme becomes operational until June 30, 1999".
The foreign debts of the banks are being assumed by the state, however. But this was, alas, a painful necessity - one that makes it essential to close unsound banks and recapitalise the remainder at once.
Yet the deal is not enough to stop the economy's collapse, let alone secure recovery. The country's dire plight is similar to that of the worst hit transition economies. Some analysts are forecasting falls of 20 per cent in gross domestic product this year. Behind this lies the exchange rate tumble, which has pushed the annual rate of inflation to over 50 per cent.
Indonesia needs the government to make a credible transition to democratic elections, while pursuing structural economic reform. If there is to be the slightest chance of this happening, generous international support must be forthcoming, some of which will have to be used to cover the budget deficit. Moreover, the overhang of bad private debt will also have to be written down quite soon, not just rescheduled. To fail to do this will be to repeat mistakes made in Latin America in the 1980s.
Indonesia's economy has suffered from a downward spiral of lost credibility, currency collapse and political turmoil that has at least removed Suharto. The debt deal should help restore confidence, but will not be enough, on its own. A smooth political transition and policy reform, underpinned by strong international support, are also required. Can all this be done? With vast difficulty. But there is no alternative to trying.