Speed the sales of assets<\/p>\n
Christopher Lingle, Global Strategist, eConoLytics.com,
\nCLINGLE@eConoLytics.com<\/p>\n
Indonesia has made painfully slow progress in its structural
\nreform and its timetables agreed to with international lenders
\nand donors have constantly been renegotiated or violated. A
\ncombination of high indebtedness and dubious corporate and
\npolitical governance are harming the economy's future growth
\npotential.<\/p>\n
A poor credit rating prevails that causes companies and the
\ngovernment to pay higher interest rates on borrowing. On top of
\nthat, there is an\"Indonesia discount\" whereby stock prices of
\ndomestic companies are low compared to their peers in other
\nmarkets because of a lack of corporate transparency and
\naccountability. And this will prevail until there is more
\nreform of the financial sector and debts of the corporate sector
\nare sorted out.<\/p>\n
Even though some financial institutions have achieved higher
\ncapital-adequacy ratios, too little has been done to sort out
\nnon-performing loans. Financial institutions need to do more to
\nimprove credit risk assessment and lending practices while being
\nmore aggressive about asset quality to force corporate
\nrestructuring.<\/p>\n
While some monitoring of market activity may be needed to
\nguarantee fair competition, there can be less government
\nintervention by allowing markets to have a larger role in
\nimposing market discipline. A market-oriented system will
\nintroduce pressures from shareholders and creditors combined
\nwith competition and the threat of bankruptcy will impose
\ndiscipline upon companies.<\/p>\n
Until there is privatization of the nationalized commercial
\nbanks, there will be further delays in bank-led restructuring of
\nthe corporate sector. And there should be less interference by
\nthe government in the management of banks to ensure that their
\nactions are autonomous and meet global standards of operation.<\/p>\n
Part of the delay has been prompted by a misguided fear that
\nhasty disposal would allow foreigners to acquire valuable assets
\nat \"fire sale\" prices. The error in this reasoning should be
\nobvious.<\/p>\n
First of all, it is better to have a short, sharp shock so
\nthat the system can begin to recover quickly. Secondly, low
\nprices paid by private sources will relieve taxpayers of
\nadditional burdens and allow enterprises to become the source of
\ntax revenues rather than a continuing drain on public coffers.<\/p>\n
And the implicit economic nationalism that resists foreign
\npurchase of distressed assets defies market logic. For these
\nsales are a positive-sum game where both parties find themselves
\nin improved situations. It is erroneous to present such
\ndivestments as a zero-sum game where the gains of a buyer are
\nswamped by losses to the seller.<\/p>\n
With the decision made to return assets held by Indonesian
\nBank Restructuring Agency (IBRA) to private control, it should be
\ndone sooner rather than later. Yet more delays are on the table
\nthat include offering improved terms for the debtors who
\nsquandered Indonesia's resources. This is a travesty on both
\naccounts.<\/p>\n
It would be better to give away all the assets rather than to
\nleave them locked up in a non-productive condition. It is bad
\nenough that capital is being withheld from a stagnating economy,
\nbut it is also certain that asset quality will continue to
\ndeteriorate due to depreciation.<\/p>\n
As it is, taxpayers, especially those of future generations,
\nmust pay for the bank-restructuring program. One of the most
\npressing problems is Indonesia's exceptionally high public-sector
\ndebt. It turns out that the burden of public-sector debt per
\ncapita is almost double Indonesia's annual per capita GDP.<\/p>\n
Prior to 1997, Indonesia's outstanding debts were less one-
\nquarter of GDP.They now exceed 80 percent of GDP. Under the
\nweight of this debt is a potential fiscal disaster that could
\noccur in 2004 when a large proportion of existing government
\nbonds will come to maturity.<\/p>\n
Much of the public-sector debt was incurred from bonds worth
\nRp650 trillion (US$64 billion) to assist with bank
\nrecapitalization, equal to about half the GDP at the time. This
\nmade it the largest amount spent for bank bailouts by any country
\nin the world. This process was monumentally mishandled and forced
\nthe central bank to a state of illiquidity.<\/p>\n
Most of the bonds require repayment of principal within 5-7
\nyears of their issue dates. Of the total, nearly Rp130 trillion
\nis must be redeemed during 2003.<\/p>\n
Interest payments on this debt are consuming a significant
\nportion of the public-sector budget, with payments on interest
\nand principal currently consuming about one-third of government
\nrevenues. During 2001, about Rp80 trillion in interest must be
\npaid out to holders of bonds.<\/p>\n
In the first instance, the endless political maneuvering must
\nstop so there can be a restoration of confidence that the right
\npolitical decisions can be made and implemented. Unfortunately,
\nthere is no indication that there is any responsible or strategic
\nthinking on how to repay these vast sums, which are equivalent to
\nabout 65 percent of annual GDP.<\/p>\n
Instead, there have been never-ending rounds of turmoil at
\nBank Indonesia and questions about the determination of the
\nleadership of IBRA to sell off assets.<\/p>\n
Indonesia's serious economic problems require hard decisions
\nthat must be made soon. To date, none of the past, present or
\nprospective leaders have offered a vision of Indonesia's future.
\nInstead of expressing concern for the well being of the
\ncitizenry, they seem more focused on their own bank accounts or
\nproviding favors for special interests.<\/p>\n
It is important to break the cycle whereby legislators and
\nmembers of the executive branch engage in internecine bickering
\nor look after their own personal interests. Otherwise, the
\neconomic future of all Indonesians will be squandered.<\/p>",
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