Debtor-creditor date

The two-day conference on Indonesian corporate foreign debt that ended here on Tuesday was not designed to reach any concrete deals but mainly to jump-start negotiations between creditors and debtors. That seemed a fairly petty task for such a massive gathering which brought together participants from all around the world.

But simply by accomplishing that objective, which by and large it did, the conference will go a long way to resolving the complex issue of the huge debt overhang. The problem is that most Indonesian corporate debtors have not only stopped talks, they have ceased repaying debts from early this year when the rupiah lost almost 80 percent of its value against the U.S. dollar and increased their debt burden fourfold.

It was also fortunate, though, that the mood at the conference -- which was attended by around 1,200 debtors, creditors, lawyers, consultants, auditors and officials -- was buoyed by better macroeconomic conditions.

The rupiah has now stabilized at a range of between 7,000 and 7,800 to the U.S. dollar, gaining almost 40 percent in value last month alone. Inflation is on the decline, with the consumer price index falling by 0.27 percent in October from a rise of 3.75 percent in the previous month. Exports also have been reinvigorated.

This conducive climate, combined with the better institutional infrastructure provided by the Frankfurt Agreement concluded last June and expeditious legal rules under the Jakarta Initiative launched in September, will help maintain the momentum of debtor- creditor negotiations until concrete deals for debt restructuring are hammered out.

Under the Frankfurt agreement, Indonesian debtors are allowed to reschedule debt repayments over eight years, including a three-year moratorium on principal repayments in which only interest must be paid. They are also guaranteed access to dollars at a pre-determined rate by the Indonesian Debt Restructuring Agency (INDRA).

The Jakarta Initiative provides a better legal infrastructure for the debt restructuring process through such business restructuring deals as debt-equity swaps, new share issues, mergers and foreign stakes in local companies.

Like bank restructuring, a solution to the US$67.7 billion foreign debt problem (not including $12 billion owed by Indonesian banks), is crucial to ending the economic crisis. Without debt restructuring, foreign investors will be unlikely to return to the country and Indonesian businesses will be left isolated from the international financial community. Debt rescheduling will also make it easier for the government to assess the demand for foreign exchange, thereby minimizing the risk of instability in the foreign exchange market.

The Coordinating Minister for Economy, Industry and Finance Ginandjar Kartasasmita rightly argued at the opening of the meeting that without substantial progress toward resolving the problems facing Indonesian business, the momentum recently built up in the economy will be lost. It is truly vital that the corporate sector takes action to resolve the debt problem. It is only when all corporations begin to produce, pay tax, and hire workers that the economy will reemerge from its own ashes.

However, negotiations will be smooth and lit by mutual understanding only when both sides meet in good faith and are fully honest with each other. Indonesian debtors should realize that regardless of whatever financial distress they are suffering, they cannot simply stop repaying their debts and sit back to wait for the turbulence to die down. By behaving that way, they will never again be able to do business with third parties and obtain new credit from domestic and foreign banks.

On the other hand, creditors need to fully understand that the debt problem is not entirely of debtors' own making. They should agree to restructure outstanding loans over a longer period and offer debt write-offs to inject a dose of mutual good faith into the negotiations. Resolving debt disputes through bankruptcy proceedings, although now much easier under the new insolvency law, would at best give creditors a Pyrrhic victory.