Delaying asset sales

Politicians and analysts with nationalistic sentiments may suspect the IMF's strong criticisms of the House of Representatives' move last week to delay the sales of government shares in Bank Central Asia and Bank Niaga as more international pressure to force Indonesia to dispose of its assets at fire-sale prices to foreign investors. After all, such a hidden agenda has often been suggested by strong critics of the International Monetary Fund. They allege that the multilateral body might have been used by foreign investors as a lobbyist to enable them to acquire assets in Indonesia at very cheap prices.

However, notwithstanding several mistakes made by the IMF in its bailout program in Indonesia since November, 1997, such suspicions or allegations seem to be groundless. Empirical data from countries such as South Korea and Thailand, which have been much more successful in implementing IMF bailout programs since late 1997, have concluded that asset sales did contribute greatly to helping lift their economies up from near bankruptcy.

True, the House's reasoning for the delay -- waiting for market conditions to improve in order to realize much better prices -- is also quite sensible and legitimate. But this position is viable only in normal circumstances but is not feasible for distressed assets and certainly not possible under the current economic conditions where the state budget continues to bleed and the quality of the Rp 600 trillion (US$69 billion) worth of assets (book value) under the management of the Indonesian Bank Restructuring Agency (IBRA) tends to deteriorate.

The dilemma here is that without a significant jump start from asset sales, the nascent recovery will remain fragile and the value of the assets currently held or managed by IBRA will remain in the doldrums. It is like a chicken-and-egg situation.

Asset sales or recovery will produce several major benefits for the economy. First of all, such measures will generate additional revenues for the government to enable it to reduce its debts which for the next fiscal year alone will impose a burden of Rp 77 trillion in interest payments. Without a significant, steady cut in the debt burden, the budget deficit will eventually explode to an unsustainable level, thereby increasing the country's risk level in the eyes of international investors and worsening the nation's economic woes.

Yet more important than additional revenues is the fact that asset sales will accelerate corporate restructuring as the buyers (new investors or owners) will certainly move quickly to improve the business performance in order to raise the value of their investments, thereby reinvigorating the economy and eventually increasing the value of the remaining assets that have yet to be disposed of.

Certainly, selling distressed assets in as risky an environment as the one in Indonesia now would be possible only with a substantial discount. As most domestic companies are now suffering from depressed domestic markets and heavy debt burdens incurred as a result of the steep fall in the rupiah's exchange rate, most of the assets disposed of could fall into the hands of foreign investors. This phenomenon may give rise to a new wave of nationalistic sentiment over the risk of the economy being controlled by foreign interests. But the alternatives given the present situation are severely limited. Either the government holds on firmly to the distressed assets but at the risk of driving the economy into total bankruptcy or allows foreign capital to provide new strength to our national capacity to take over again.

Without fresh capital inflows, the economy, which is now on the verge of bankruptcy, could collapse entirely. However, new foreign direct investment under present conditions is mostly feasible only through asset acquisition because most economic sectors are still mired in excess capacity as a result of the 14- percent economic contraction in 1998. In fact, foreign acquisition of assets could serve as a catalyst for other investors to enter the country and would accelerate the corporate restructuring process through the introduction of good governance practices.

The entry of foreign investors into nationalized banks such as Bank Central Asia and Bank Niaga is especially vital because that would accelerate the bank restructuring process, which is vital to sustaining the budding economic recovery. This, we think, is the reason why the IMF considered the delay in the sales of the two banks to be quite a setback in asset recovery and the loss of a great opportunity to boost market sentiment in the economy.

The government needs to break the ice in asset sales. Most important, though, is that asset sales should be conducted through an open, competitive bid system to attract the best investors with a long-term interest in the country's economy.