Analysts concerned by RI's debts

Analysts concerned by RI's debts

JAKARTA (JP): The Brussels-based International Crisis Group
(ICG) is concerned about Indonesia's limited capacity to reduce
its huge public debts (foreign and domestic) which have reached
US$154 billion, which is equal to the country's gross domestic
product.

Due to numerous political and legal obstacles, and because of
a strongly-entrenched patronage system, the Indonesian government
may remain unable or unwilling to take on wealthy or powerful
vested interests which oppose reform measures, the ICG noted in
its latest report on Indonesia.

"The problem of reducing Indonesia's public debt to more
manageable levels is inseparable from the wider problems of
fragmented politics, a malfunctioning legal system and a
political culture dominated by rent-seeking and corruption.

The problem is not a shortage of policy options, but the
government's inability or unwillingness to implement fully a
policy agenda it has agreed with its external creditors," it
pointed out.

The ICG report titled Bad debt: The politics of financial
reform in Indonesia, a copy of which was obtained by The Jakarta
Post on Thursday, puts the government's external debts at $84
billion (including those of state firms) and domestic debts at
$70 billion. In addition, the private sector owes an estimated
$110 billion.

The ICG, which runs advocacy offices in Washington, New York
and Paris, is committed to strengthening the capacity of
international communities to anticipate, understand and act to
prevent and contain conflicts.

The private, multinational organization noted that some
external creditors seemed unwilling to consider further
rescheduling of Indonesia's debts upon learning that the
government had shied away from reforms for short term political
reasons.

"But if Indonesia's ability to repay its debts weakens for
reasons beyond the government's control, lenders may have to
choose between granting further relief (rescheduling or easier
terms) and seeing the government default," it cautioned.

The government is scheduled to hold a new debt rescheduling
meeting with the Paris Club sovereign creditors next month but
these talks are contingent upon a new Indonesia-IMF agreement on
reform measures that has been delayed since last December.

The current state budget allocates Rp 53.5 trillion for
domestic debt servicing and Rp 23.1 trillion for foreign debt
servicing based on an exchange rate of Rp 7,800 to the dollar.

But the rupiah's exchange rate has been above Rp 9,000 since
January and even been exceeding the Rp 10,000 level since early
last week.

The ICG asked lenders to be realistic about what they could
expect from the government which did not have majority support in
the legislature nor the political will to distance itself from
vested interests.

Rapid asset recovery by the Indonesian Bank Restructuring
Agency (IBRA), which holds about $55 billion in assets taken over
from nationalized and closed banks, is one way of reducing
government debts.

But the ICG argued that the absence of consensus between the
government and legislature on acceptable prices and buyers of the
assets, had often delayed asset sales and caused controversy that
damaged Indonesia's image with investors.

It urged full transparency in asset sales and debt
restructuring deals by IBRA and suggested independent reviews of
all transactions above an agreed size and publication of the
results of such reviews.

"This would slow down asset sales and debt restructuring, but
delay is a price worth paying if the result is transactions that
are more widely accepted by the public," the group added.

The ICG also recommended that the government considered
formulating a coordinated strategy on asset sales that covers
both IBRA and the privatization of state companies and which
involves consultations with the legislature, external lenders and
investors, civil society groups, regional administrations and
affected communities.

This strategy should set realistic recovery rates and lay down
procedures for sales that are consistently transparent in order
to avoid objections to a sale.

"This process might be lengthy, complex and bogged down, but
the record of failed or stalled asset sales is long enough to
suggest the need for rethinking," it said. (vin)