Delaying asset sales

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.