Corporate restructuring a must

Corporate restructuring a must

Politicians who whip up narrow-minded nationalistic sentiment against foreign investors acquiring assets in Indonesia seem unaware of how vital asset disposal, corporate restructuring and divestment of nationalized banks are to economic recovery. They overlook the reality that companies which are hostage to bad debts will remain closed to credit lines, thereby unable to raise production rates to meet domestic and export demands. Banks are thus deprived of creditworthy borrowers to funnel their excess liquidity, and they are forced to continue relying mainly on interest revenues from the government bonds they hold as their capital. The sale of distressed assets is also vital as only new, credible investors will be able to reinvigorate these businesses by bringing in better management and fresh capital. Technically bankrupt companies are virtually in a state of limbo as long as they are under the Indonesian Bank Restructuring Agency (IBRA), with it unclear if they are owned by the agency or their founders. Without definitive ownership, there is always the temptation for the management and old owners to strip assets. Divestment of nationalized banks is equally crucial because almost all the largest banks are now majority owned by IBRA. As long as these banks are under IBRA control, they will remain fragile, unable to fully regain market confidence. Only new majority owners with high integrity, an international reputation and extensive networks will be able to accelerate the operational restructuring of the banks, something that has become more imperative than ever as the government begins phasing out its blanket guarantee on bank deposits and claims next year at the latest. Further postponing the establishment of a deposit insurance scheme to replace the blanket guarantee not only creates a moral predicament but also exposes the government to huge contingent liabilities. Moreover, banks need to allocate more resources to rebuild what analysts call their informational capital-the base of creditworthiness information-without which their lending ability will remain impaired. Information on corporate creditworthiness, which the banks compiled and stored in their system for decades, was destroyed when almost all major banks collapsed in 1998. Rebuilding a reliable creditworthiness information system is both expensive and time consuming because the system actually sums up both lending mistakes and successes, and with the information accumulated rendered highly corporate specific. The catch is that without a reliable and broad creditworthiness information base, banks are either highly averse to new lending or vulnerable to bad credits. Such a condition is unconducive to corporate growth in Indonesia, where the capital and money markets still acutely lack depth and breadth.

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