In search of debt solutions<\/p>\n
By Mohammad Sadli<\/p>\n
JAKARTA (JP): The article \"Can half a program succeed?\" by
\nABN-AMRO Bank's country manager C.J. de Koning in the Jan. 23
\nedition of The Jakarta Post deserves attention. It addressed the
\nurgent problem of private sector debt which has been the major
\ncause of the rupiah's steep fall in value.<\/p>\n
The IMF 50-point agreement contains a promise for private bank
\nreform, but there is no indication how private sector debt
\nservice payments can be made without wrecking the foreign
\nexchange market. The usual policy line is that this burden is not
\nthe responsibility of the IMF and the government and that the
\ngovernment \"will not bail out\" defaulting private companies. Such
\nan action would create a bad precedent and is full of moral
\nhazards.<\/p>\n
De Koning estimates that the private sector has a foreign
\ncurrency debt level of about US$65 billion. Nearly all of this
\nwas borrowed from foreign banks, with another $15 billion
\narranged via the capital market. The average rate of maturity of
\nall of these loans is approximately 1.5 years, which means that
\nin 1998, companies are expected to pay $59.8 billion in interest
\nand principal to foreign lenders.<\/p>\n
In his article, de Koning states: \"No country can generate
\n$59.8 billion in one year of an $80 billion debt. Indonesian
\ncompanies have in the past shown an ability to earn back their
\ndebts, varying on the type of industry, in about three to five
\nyears. This would still require $28 billion in debt service ($20
\nbillion in principal and $8 billion in interest) in 1998. On top
\nof this comes the government debt service of $7.8 billion. Under
\nthe current fragile conditions, these amounts may or may not be
\npossible to finance for the country as a whole.<\/p>\n
\"I therefore propose an arrangement in which Indonesian
\ncompanies would settle their debts in rupiah, equivalent to the
\namount of the dollar debt service on the due date (at the
\nprevailing exchange rates) and pay into Bank Indonesia in favor
\nof foreign banks. The foreign banks could agree with Bank
\nIndonesia not to take out the dollar-equivalent amount
\nimmediately but to stretch the amount over an eight-year period.
\nThis would reduce total debt service for the country (equal
\ndollar demands) to some $25.8 billion in 1998.\"<\/p>\n
De Koning continues: \"When corporations are financially
\nhealthy again with the help of some owners repatriating some
\nforeign assets, then economic growth could return, exports could
\nflow at higher levels, the rupiah could strengthen to more
\nreasonable levels, local prices could drop, foreign currency
\nloans could again become available to good companies, foreigners
\nwould be willing to invest in the Jakarta Stock Exchange, and the
\n$25.8 billion would be easily serviceable.\"<\/p>\n
Does de Koning imply that such a change in the state of
\naffairs (compared with the hellish situation now) could come
\nabout in 1998 in spite of zero growth in the economy and a near
\nor imminent collapse in the manufacturing and service sector? If
\nit could bring about greater stability in the exchange rate in
\nthe short run, it would be a worthwhile proposition.<\/p>\n
The crucial elements of his scheme deserve proper attention.
\nIf such a scheme could be implemented, short-term debts could be
\nconverted into medium-term liabilities. That definitely would
\nlessen annual debt service obligations. The question is, who
\nwould guarantee the original lenders for the eight long years and
\nat what amounts? The implicit answer is: Bank Indonesia, with the
\nconsolation that \"when corporations are financially healthy
\nagain...etc.\" I do not think that the \"the coordinating entity
\nwhich could be set up jointly between foreign banks and local
\nIndonesian companies to help organize the process\" would accept
\nthe risk.<\/p>\n
The next question is: to what companies would the facility be
\noffered? There are hundreds, perhaps thousands of companies with
\npresently unserviceable short-term debts. But they would be
\ndifferent in their viability under the new circumstances and in
\nthe medium term. The consortium could sort that out, and not
\neverybody would be accorded the facility. But could the process
\nbe implemented in a one or two month period of time? And how
\nwould people with a vested interest and with political clout be
\nprevented from always cutting to the front of the queue?<\/p>\n
The guiding principle should be equitable burden sharing
\nbetween foreign banks and creditors (who since the mid-1980s
\naggressively pushed billions of dollars of loans down the throats
\nof hungry domestic companies), domestic debtors and, to some
\nextent, the government and foreign governments (such as in the
\nbank bailouts in the U.S., Mexico, the Scandinavian countries,
\nand perhaps soon in Japan and Korea).<\/p>\n
A formula for equitable burden sharing would be immensely
\ndifficult to devise, but it should be done lest foreign lenders
\nin the end lose everything. On the other hand, in the Indonesian
\nexperience, government banks and the central bank have often
\nbecome the fall guys in the end.<\/p>\n
It would be impossible for the government to try to keep all
\nprivate businesses afloat while facing their debt service crunch.
\nIt would also be morally questionable if it did try since the
\nbusiness practices of some of these companies contributed to the
\ncurrency crisis in the first place.<\/p>\n
De Koning's idea could be applied, first of all, to our
\nprivate sector banks. Their outstanding debt pressure is much
\nsmaller, perhaps in the order of $15 billion for 1998.<\/p>\n
Because it is much less than the total debt service demand,
\nthe pressure on the rupiah may continue to be severe. It would
\ntake time -- perhaps more than three months -- to implement de
\nKoning's proposal to cover a substantial part of the total
\nprivate sector. We may not have that much time.<\/p>\n
The writer is a noted economist and a former minister of
\nmines.<\/p>",
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