Government moves to tackle huge domestic debt

Government moves to tackle huge domestic debt

Dadan Wijaksana, The Jakarta Post, Jakarta

The government has stepped up its efforts to make its huge
domestic debt more manageable by putting in place policies
designed to reduce the debt burden on the state budget, a move
analysts noted as "a good initial step" towards avoiding
financial disaster in the future.

The government plans to introduce several schemes, including a
debt settlement agreement with Bank Indonesia and policies to
accelerate the reduction of government bonds in banks.

Economist Bustanul Arifin hailed the move as "a fine step",
but he said it would not completely resolve the problems
surrounding domestic debts.

"I appreciate the government's plans, but they will not solve
all the problems. They will only shift the problems, not solve
them," Bustanul told The Jakarta Post on Monday.

The government's domestic debts, all in the form of bonds,
currently standing at a staggering Rp 660 trillion (around US$73
billion). The state budget covers the interest on the bonds. A
large part of these bonds will mature in 2009, which could
trigger a fiscal disaster unless the government restructures the
maturity profile.

Making up the lion's shares of the bonds are some Rp 432
trillion worth of bonds injected into ailing local banks in the
late 1990s to boost their capital.

The government also owes some Rp 229 trillion worth of bonds
to the central bank, maturing between next year and 2018.

To settle its debts with Bank Indonesia, the government plans
to issue special bonds without maturity profiles, called
perpetual promissory notes (PPN), to replace some Rp 159 trillion
worth of the bonds held by the central bank.

Under the deal, the government will not have to pay interest
on the bonds, to the extent that Bank Indonesia's capital
condition is not jeopardized.

As for attempts to reduce the recap bonds in banks, the
government, through the Indonesian Bank Restructuring Agency
(IBRA), will provide incentives to accelerate the progress of the
asset-to-bond swap program.

IBRA is currently in the process of selling off around Rp 150
trillion of bank loan assets, under which it encourages local
banks to purchase the assets by using recap bonds as payment.

The agency took over the loans from troubled banks in the wake
of the 1997/1998 banking crisis.

As an incentive, IBRA will treat the recap bonds at 100
percent of face value.

The recapitalized banks can directly replace their bonds with
loans from IBRA, especially those restructured ones, so they do
not have to set aside additional funds for provisions.

In the case of IBRA obtaining cash from the sale of the loan
assets, it has pledged to use part of the proceeds to redeem the
bonds from the banks.

IBRA Chairman Syafruddin Temenggung has said that the agency
was targeted to achieve a recovery rate of around 30 percent from
the loan asset sale program.

Drajat Wibowo said the asset-to-bond swap policy was the best
way currently available to try to reduce government bonds in the
banks.

"... Because it will not only reduce the burden on the state
budget, but will also reactivate the banks' intermediation role,"
Drajat said.

Unlike its foreign debts, servicing its domestic debts has
proven to be a more of a threat to the government in terms of the
massive impact it is having on the state budget.

Not only do the domestic debts have shorter maturity periods,
a large chunk of them also carry higher rates of interest.

For example, the government has to set aside some Rp 60
trillion this year to service the interest on domestic debts,
almost three times the amount it has to allocate for servicing
foreign debts.

Elsewhere, Bustanul said that aside from the above policies,
the government must also speed up the restructuring of indebted
companies, privatization of state-owned enterprises, and
spreading out the maturing of the bonds by issuing new bonds
called Treasury bills.