A smart way of controlling Indonesia's money

A smart way of controlling Indonesia's money

Pitan Daslani
Journalist
Jakarta

If you wish to control Indonesia's money, buy its banks. In
its portfolios, there are large amounts of risk-free government
re-capitalization and treasury bonds on which you would feast as
the cash-strapped government would continue to pay interest
obligations in return for your generous bid.

Farallon Capital knew it too well. Teaming up with cigarette
producer PT Djarum Kudus, it is now rejoicing with godsend
interest payments on Bank Central Asia's (BCA) Rp 57 trillion
worth of crisis-born bonds without worrying about the bank's
intermediary role.

A bigger harvest in the banking industry will come about this
year when Bank Mandiri and Bank Danamon are divested. It would
jolt the Indonesian public, and would represent a pestilent
harvest for the government. And yet it could be a rewarding era
for foreign investors wishing to strengthen their foothold here.

In the case of Bank Danamon, the buyer would feast on the
interest payments worth Rp 20 trillion, despite the fact that the
total value of its government bonds is Rp 40 trillion. This is
why Djarum Kudus is preparing to grab Bank Danamon, either
through a partnership with Farallon in Farindo Investment Ltd, or
through other avenues.

Bank Mandiri, meanwhile, would give the buyer self-generated
revenue from government interest payments and installments on
nearly Rp 100 trillion worth of recapitalization bonds, not to
mention that from Treasury bonds absorbed in early January.
Mandiri is aiming, if not silently moving, to buy back credits
previously taken over by IBRA.

These banks are to be divested along with 14 other state-owned
enterprises this year. Apart from a reluctant state-oil and gas
company Pertamina, Bank Mandiri and Bank Danamon are gold mines.

The government needs to reduce by Rp 40 trillion this year the
burden of its Rp 650 trillion worth of recap bonds held mainly by
state banks through the issuance of T-bonds and T-bills, as well
as through the repurchasing of IBRA assets to be done by the
state banks. These will all go into the banks' treasury -- a
lucrative gold mine that investors will not ignore.

What you need to do is team up with local good-performing
corporations whose stocks are included in the blue-chip category,
or, for more efficiency, set up a consortium in Singapore,
Malaysia or Hong Kong, even if it had to involve old owners of
the companies whose assets have been confiscated by IBRA.

This sounds weird but old actors master the ins and outs of
local market tricks, and the art of evading all the curious
officials and lawmakers eagerly standing by the divestment
process.

The government does not like this theory, neither do the paid
demonstrators. Yet money recognizes no nationalism. For if the
government had ever liked it, it would not have acted like a late
Santa awkwardly offering more than necessary to strategic
investors.

Then, just watch local professionals run the show. Your almost
50 percent stake does not make it necessary to worry about how
the business is run. Wait for the turn of the year to treat
yourself to generous dividends. Pay the directors and managers in
rupiah, not U.S. dollars. Be sure to retain your foreign
financial advisers to prevent foul play on the floors of the
Jakarta Stock Exchange or in currency trading and project
financing.

Maintain friendly and personal relationships with relevant
officials and fussy legislators, and you have a strong foothold
in the banking sector.

State-owned companies on the offering list today, apart from
Bank Mandiri and Bank Danamon, are Indo Farma, Pupuk Kaltim,
Wisma Nusantara, Kimia Farma, Sucofindo, PTPN II, Sarinah,
Soefindo, TBB Bukit Asam, Krakatau Steel, Bank Mandiri, Angkasa
Pura II, Indocement and Semen Gresik.

If you could set up such consortiums to join the race and take
over those state-owned corporations in banking, pharmaceutical,
airport management, mining, fertilizer production, plantations,
the steel industry, the cement industry, hotels, shipping
inspection & surveying and retail sectors, you would be the owner
of the Indonesian economy with a vast business empire that would
be as honored as the IMF.

And if 20 more people like you come and do the same, you would
play the role that privileged tycoons once did during the
Soeharto era.

Such is the evolving mainstream in Indonesia's business
politics today. Cutting off the IMF life-line by the end of this
year would require a gigantic effort to generating domestic
revenue for which there are only three options in sight today.

First, widen the tax base and improve tax collection. This is
favorable, but walls put up by those with "vested interests" and
the erosion of the authority of law coupled with endless and
aimless political infighting may kill the idea.

Secondly, enhance penetration of the global market to bring
home more export revenue. But rising industrial production costs
continue to weaken Indonesia's competitive edge.

This option requires revival of the real-sector economy, for
which re-activation of the banking industry's intermediary role
to a significant level is a must. This course is unfortunately
being blocked by continuous offers of government bonds which
lullaby the banks into a deep sleep.

The third, preferred option, is selling off state assets to
get quick revenue. Arguments of financial urgency have defeated
nationalism to the extent that the government does not wish to
take a break until it has sold everything in the backyard,
regardless of the future consequences.

But as of November 2002, according to a Bank Indonesia report
published by IndoCapital.com, the total net profits of 141
Indonesian banks stood at Rp 800 billion against their total
assets worth Rp 1,096 trillion. So the ratio of profit margin
against assets was only 0.07 percent. Is all this is why the
government is hastily finalizing preparations for selling them
off to strategic investors?

Foreign investors can never rule Indonesia's economy in the
political lexicon. However, every chance is now open for
international investors to turn this country into a kind of
Indonesia Inc. The second trendy step -- after the investors'
traditional entry -- is to buy Indonesian banks and other
corporations of their scale.

The third step may be setting up of a new IMF-like lending
group comprising multinationals with investments here to provide
loans to the government of Indonesia Inc. It really sounds weird
now, but it is very probable, given the orientation of the
upside-down world of business politics today.