Reducing debt burdens<\/p>\n
The Indonesian government often looks highly ingenious at
\nsimplifying complex problems in a bid to dismiss the great
\nconcerns about its distressed financial condition. Its latest
\nidea was unveiled in Minister of Finance Boediono's statement
\nlast week that the government would issue treasury bills next
\nyear to gradually replace the Rp 674.4 trillion (US$64.2 billion)
\nbonds that start maturing in 2002.<\/p>\n
Earlier in September, Boediono said asset sales, privatization
\nand corporate debt restructuring would be accelerated next year
\nto enable the government to retire early Rp 25.8 trillion in
\nbonds, thereby reducing the deadweight costs of the huge domestic
\ndebt overhang.<\/p>\n
We wish the solutions were as simple and as easy as the
\ngovernment would want us to believe. But harsh reality forces us
\nto treat the concepts with significant reservations and
\nqualifications.<\/p>\n
First of all, the revenue targets set for the sale of assets
\nby the Indonesian Bank Restructuring Agency and privatization of
\nstate companies next year appear too ambitious, because a portion
\nof the sale proceeds will be used to plug part of the budget
\ndeficit. The new targets require a total revenue of Rp 43.7
\ntrillion from the two programs next year, while during the
\ncurrent fiscal year only Rp 20.5 trillion of the Rp 33.5 trillion
\ntarget had been achieved as of October.<\/p>\n
Issuing T-bills, discounted debt instruments of one year or
\nless that pays its face value at maturity, is even more complex
\nand greatly challenging, even though that instrument is badly
\nneeded now to help increase the depth of the financial market.
\nBecause, unlike the government bonds already in circulation, T-
\nbills will perform the double function of raising funds and
\nsetting benchmark interest rates.<\/p>\n
Even if the House of Representatives cooperates fully in
\nenacting a bond law sometime next year, legislation alone cannot
\nguarantee the tradability of T-bills. Without a liquid secondary
\nmarket, this instrument would be very much similar to the medium
\nand long-term government bonds already issued to recapitalize
\nbanks and to fund the blanket guarantee on bank deposits and
\nclaims.<\/p>\n
The outstanding bonds cannot be used as a benchmark because
\nthey were issued at par directly to the buyers, instead of being
\npriced against the local bond market. As they were not sold
\nthrough auctions they do not reflect the sovereign risk from the
\nviewpoint of bond investors and they are held mostly as
\ninvestments and not as trading instruments. No wonder only about
\n17 percent of the total bonds have so far been sold on the
\nsecondary market.<\/p>\n
T-bills will have to be subject to a sovereign risk rating to
\nmake them attractive to investors because it is this rating that
\nwill primarily set their discount rate. Unfortunately, the
\nsovereign risk is the most worrisome factor, in view of the huge
\ndomestic and foreign debt burdens of the government that have
\nexceeded the country's gross domestic product and the very slow
\npace of its reform program.<\/p>\n
Since Indonesia's only credit rating agency, PT Pefindo, has
\nyet to gain much credibility, T-bills will have to be assessed by
\nan international rating agency to make them viable to domestic
\nand foreign investors, notably institutional ones such as pension
\nfunds and insurance companies.<\/p>\n
Sadly though, the government rates poorly in most of the key
\nfactors assessed in the sovereign risk rating: The stability of
\npolitical institutions and degree of popular participation in the
\npolitical process, income and economic structure, economic growth
\nprospects, fiscal policy and budgetary flexibility, monetary
\npolicy and inflationary pressures, and public debt burdens and
\ndebt service track record.<\/p>\n
Added to these risks are contingent government liabilities
\nrelated to the blanket guarantee on bank deposits and claims.
\nEven though the blanket guarantee has still to be maintained in
\nview of the weak banking system, its coverage should be decreased
\nto let the market forces screen out unviable banks. Most urgent
\nis the lifting of inter-bank loans from the guarantee scheme to
\nremove moral hazards in inter-bank lending. If a banker himself
\nis not capable of assessing the creditworthiness of another bank,
\nlet him lose his shirt.<\/p>\n
Because of the guarantee, many banks now opt for the easy
\nroute of plowing their funds into the inter-bank market, instead
\nof venturing out to fund viable corporate borrowers.<\/p>\n
Needless to say, the government should work harder to reduce
\nthe sovereign risks to facilitate the issuance of T-bills. The
\nmost effective way of decreasing the sovereign risks is to
\naccelerate the pace of reform measures, including the cleaning up
\nof the banking industry, asset sales, privatization and stronger
\nlaw enforcement. Without significant progress in these areas, the
\neconomic outlook will remain bleak. Obviously, the market will
\nnot buy debt instruments from a government with distressed
\nfinancial prospects.<\/p>",
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"sponsor": "Okusi Associates",
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