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.