Collective solution to debt problems ineffective

The demand for speedier private sector debt repayment has been cited as the main reason behind the recent run on U.S. dollars. Economist Kwik Kian Gie discusses joint efforts by the government and the business sector to solve the debt problem.

Question: President Soeharto has assigned Radius Prawiro, an economic consultant to the government, to lead businesspeople in seeking a solution to their foreign debts. What do you think about this?

Kwik: The debts should be solved individually on a case-by- case basis because the businesspeople have obtained their debts from foreign banks through individual transactions with specific characteristics. The capital structure of their companies is specific. Each of the creditor banks has a specific standard in evaluating the health of its borrowers and the collaterals used in credit transactions are also specific.

Q: How do you see the debts themselves, totaling no less than US$65 billion?

K: Many of the domestic borrowers have reached an agreement with their foreign creditors on the arrangement of their debt repayment. Most of them have a sound financial structure, even though they have debts. They also keep their promise of repaying their debts as scheduled.

Due to the recent sharp depreciation of the rupiah, their debts have drastically increased. But they still have five months ahead to solve their debt problems, with new clear, acceptable schedules of repayment. If everything is clear and the borrowers are honest, foreign creditor banks will be willing to help.

Q: How could private sector debts reach as much as $65 billion and why did the borrowers meet with the President, who then appointed Radius to lead them in looking for a solution to their debt problems?

K: As we can see from television and press reports, the borrowers comprised 70 of the country's biggest businesspeople. Their total borrowing was therefore very large, of which $65 billion had no clear solution.

They have not solved their debts because they have not reached agreement with their creditor banks.

I heard from foreign bank executives that they were surprised to see that the borrowing companies were not transparent in their financial reports and in their proposals on the solution of their debt problems.

Q: What do you think about the quality of their debts?

K: I have frequently said that many large and giant conglomerates, not all of them, centralize the coordination of their financial management through their holding companies. In order to optimize the utilization of one entity debt, they allow other entities in the same conglomeration to use it. That is why their financial management is disorganized.

Many of them have been used to borrowing large sums of money without an adequate amount of equity capital. When turmoil occurs, like what is happening now, their debts will immediately turn bad and they will find it difficult to solve the debts, except when their foreign creditor banks write off most of the loans. The banks surely will not do so. When negotiations are deadlocked, they will seek a collective solution under the coordination of Radius.

Q: Do you think such a collective approach is sound and will be able to solve the debt problems?

K: Not at all. A debt deal is an individual transaction. If businessman Ciputra, for example, borrows money from Citibank, the bank will find it difficult to negotiate with third parties under the coordination of Radius, even though the government's consultant is a figure of high reputation.

According to me, such an approach will never solve the problem but will create a bad image that Indonesia's big businesspeople apparently have a "gang-fighting" mentality, just like high school students involved in brawls.

Q: Why have large and giant conglomerates not reached an agreement?

K: Many giant companies and conglomerates are determined not to repay their debts, partly due to the fact that foreign banks and fund managers have aggressively offered them short-term credits to finance long-term projects. These are what we recognize as evergreen short-term credits -- which can be rolled over before their maturity dates.

If the creditor banks do not want to roll the loans over, there will be other banks which will offer new loans for the repayment of the existing debts.

Q: Why have many foreign banks generously provided large credits for Indonesian companies?

K: Before the economic crisis, many economists throughout the world, including those from the World Bank and the International Monetary Fund (IMF), considered Indonesia a miracle economy with very strong fundamentals.

When the crisis occurred, they started scrutinizing the economy with deep and sharp analyses. They found out that the Indonesian economy is a bubble and they, therefore, were surprised, disappointed and panicked. If they are then attacked jointly by conglomerate owners under the coordination of Radius, who has been appointed by President Soeharto, they will feel more confused and will not know what they should do.

Q: What impact will such an approach have on the macroeconomy?

K: For 30 years since 1966, Indonesia's foreign exchange reserves have been based merely on foreign capital inflows from the capital accounts, except in 1973, 1979 and 1980. As long as the private sector has not repaid their huge debts, foreign capital inflows will be stopped. The IMF and a number of countries, therefore, are providing substitute funds of up to $40 billion. That means the short-term solution has been anticipated. In the long-term, the discipline of private sector companies in repaying debts is vital for the sake of the country's macroeconomy.

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