Cohesion a must for Indonesia's recovery

Cohesion a must for Indonesia's recovery

By Sidesh Kaul

This is the first of two articles commenting on the
government's effort to resuscitate the ailing economy.

JAKARTA (JP): The International Monetary Fund (IMF), right
from the inception of the crisis in Indonesia, has stodgily
maintained its position of not interfering in the business of
corporate restructuring.

Instead, the IMF chose to impose harsh policies from an ivory
tower and restricted the definition of "economic recovery" for
Indonesia to tighten its macroeconomic policies, the
rehabilitation of banks and the imposition of guidelines for
corporate restructuring and structural reforms.

The Indonesian government, under monetary and fiscal
pressures, has had little choice but to swallow this bitter
medicine in exchange for much needed funding.

The "one-medicine-cures-all" kind of policies historically
dished out by the IMF in debt-ridden countries has only ensured a
string of half-baked recoveries. On the second anniversary of the
onset of the crisis, the several and recent self-congratulatory
media releases on the purported Indonesian recovery rings hollow
upon examination.

The meaning of "recovery" needs to be understood in context.
The relative strengthening of the Indonesian rupiah, the reining
in of inflation or the conclusion of the bank recapitalization
program alone are not reasons enough to believe that the worst is
over.

For one, recapitalization has been done on the basis of bad
loans declared by the banks on their respective books. These
books were double checked and audited by neutral, credible and
expensive experts who were flown in from all over the world. No
guarantees were issued by any party, credible or otherwise, that
there would be no surprises in the future should this bad loan
portfolio expand.

To date, there has been no mention of any plan to cope with
any expansion in the bad loan portfolio. Neither is the 20
percent portion injection from the banks' shareholders fully in
yet, nor has there been any display of intent or political will
on the part of the government to impose and collect on the
penalties from violations of the legal lending limit. Then there
is the episode of the retransfer of bad loans, under extremely
suspicious circumstances, from the Indonesian Bank Restructuring
Agency (IBRA) to the state banks. Not to forget the absence of
even a mention of a rehabilitation plan for the state banks.

Indonesian banks are a long way from recovery and there is
fear that there is no cohesive plan to shepherd the banks to
health. The IMF, along with the Indonesian government, has to
understand that the core of the problems in Indonesia stemmed
from structural and systemic weaknesses and unless and until
these shortcomings are remedied there can be no real recovery.

The reason Indonesia's recovery is a cause for concern is not
because it is a laggard when compared to the other crisis-hit
Asian countries. The concern arises because, and unlike other
Asian contagion hit countries, the bulk of Indonesia's debt
problems are on the private side and there appears to be a
significant lack of policy or direction as to how this issue is
going to be tackled other than belligerent noises being made
about debt recovery and about recalcitrant debtors being brought
to heel.

The credit for the strengthening of the Indonesian rupiah and
the reining in of inflation are a direct consequence of the
tightening of the macroeconomic policies. No attempt is being
made here to steal the thunder and glory away from the IMF or the
Indonesian government. All three measures were much needed, i.e.
the strengthening of the rupiah, the reining in of inflation and
the recapitalization of the banks.

As the Indonesian government moves forward, under the aegis
and guidance of the IMF, it cannot escape the fact that
Indonesian corporations, where the bulk of the problems lie, need
the same tender loving care and attention that was meted out to
the banks on the road to recovery.

The concern here is that despite the recognition of the fact
that the bulk of Indonesia's debt problems are in the corporate
domain, the government, as well as the IMF, are once again
adopting a "one-medicine-cures-all" kind of approach as far as
corporate recovery is concerned.

In fact the approach adopted by the government cannot be
labeled as corporate recovery -- it is more of a debt collection
exercise with little or no regard for the impact a heavy-handed
approach would have on the overall economy. The agency that has
been charged with the responsibility for this exercise is IBRA,
which has the onerous task of recovering the debts from creditors
and it has essentially stepped in where the original lenders
failed to collect.

The staff at IBRA are banking professionals who were mostly
picked from banks that were either closed down by IBRA or are
under the management of IBRA. This implies that the people who
made the wrong credit decisions in the first place now have the
responsibility of rehabilitating the very corporations they lent
to and engaging them in a delayed workout -- herein lies the
first inherent conflict and contradiction.

The writer is an observer of economic and political affairs
based in Jakarta.