Debt-rescheduling deal

Barring any major political turmoil and massive social unrest until an elected government is installed sometime next year to replace the transitional Habibie administration, the agreement on the rescheduling of US$80 billion in Indonesian corporate foreign debt will contribute to gradually strengthening the rupiah's exchange rate.

The immediate impact would be reduced pressures on the rupiah as debtors will not have to service their foreign debts during the three-year grace period.

Under the agreement, hammered out in marathon talks in Frankfurt on Thursday, Indonesian companies will be offered foreign exchange protection and assurance as to the availability of foreign exchange from a special government-backed agency -- the Indonesian Debt Restructuring Agency (INDRA). This agency will assume the full exchange rate risks of dollar-denominated debt repayments but will not provide any bailout of the private debts. Therefore, the viability of the scheme depends on a strengthened rupiah. If the rupiah falls further, the government or INDRA may be left with massive liabilities.

Debtors will be able to make their payments in rupiah to INDRA, which will repay the debts in foreign currencies. Participants in INDRA will be entitled to buy U.S. dollars at the best real 20-day average market exchange rate occurring from the date the program becomes operational until June 30, 1999.

True, the agreement between the Indonesian private debt negotiation team and international bank creditors created only a general framework for corporate debt restructuring, within which Indonesian debtors and creditors will have still to work on a case-by-case basis.

But the creditors' agreement to reschedule $60 billion in corporate debts for eight years, including a three-year grace period, and to rollover short-term banking debts up to four years will sharply curb the demand for dollars, thereby reducing the pressures on the rupiah.

Indonesian debtor companies, many of which are export oriented, will get some breathing space to consolidate their operations and restore production and exports to precrisis levels.

The export industry will get another boost from the agreement as it also includes the reopening of trade finance lines for Indonesian companies. This will reinvigorate imports of industrial basic materials, so far hindered by the international refusal of letters of credit issued by Indonesian banks, and revive international trade and economic activity.

The corporate debt scheme will reduce Indonesian external payments over the next few years and provide corporations with substantial initial cash flow relief, thus giving them an opportunity to recover from the current crisis, which has made many companies technically bankrupt.

It is obviously too early to judge the foreign exchange market reaction to the debt rescheduling deal which will become effective on Aug. 1. But its initial impact on the process of regaining international confidence in the country's economy is relatively positive.

The International Monetary Fund and the World Bank said upon learning of the agreement on Thursday that they would soon restart Indonesia's $43 billion international rescue package. The World Bank said its board would consider releasing up to $1 billion to help reform Indonesia's battered economy perhaps in the coming two weeks.

We should remember, though, that the debt-rescheduling agreement is only one component of the multifaceted program to strengthen the rupiah's rate from about 11,500 to the American dollar now, compared to 2,400 last July, in order to lead the beleaguered economy out of its present crisis. The crucial structural reforms, including the painful measures of phasing out subsidies on food, fuel and electricity, as stipulated in the agreement with the IMF, have to be carried out during the three- year bailout program.

Of no lesser challenge is that these measures have to be implemented simultaneously with overall political reform to set up a clean and strong government that is trusted by the people and the international market.