Debt-rescheduling deal

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.