In search of debt solutions

In search of debt solutions

By Mohammad Sadli

JAKARTA (JP): The article "Can half a program succeed?" by
ABN-AMRO Bank's country manager C.J. de Koning in the Jan. 23
edition of The Jakarta Post deserves attention. It addressed the
urgent problem of private sector debt which has been the major
cause of the rupiah's steep fall in value.

The IMF 50-point agreement contains a promise for private bank
reform, but there is no indication how private sector debt
service payments can be made without wrecking the foreign
exchange market. The usual policy line is that this burden is not
the responsibility of the IMF and the government and that the
government "will not bail out" defaulting private companies. Such
an action would create a bad precedent and is full of moral
hazards.

De Koning estimates that the private sector has a foreign
currency debt level of about US$65 billion. Nearly all of this
was borrowed from foreign banks, with another $15 billion
arranged via the capital market. The average rate of maturity of
all of these loans is approximately 1.5 years, which means that
in 1998, companies are expected to pay $59.8 billion in interest
and principal to foreign lenders.

In his article, de Koning states: "No country can generate
$59.8 billion in one year of an $80 billion debt. Indonesian
companies have in the past shown an ability to earn back their
debts, varying on the type of industry, in about three to five
years. This would still require $28 billion in debt service ($20
billion in principal and $8 billion in interest) in 1998. On top
of this comes the government debt service of $7.8 billion. Under
the current fragile conditions, these amounts may or may not be
possible to finance for the country as a whole.

"I therefore propose an arrangement in which Indonesian
companies would settle their debts in rupiah, equivalent to the
amount of the dollar debt service on the due date (at the
prevailing exchange rates) and pay into Bank Indonesia in favor
of foreign banks. The foreign banks could agree with Bank
Indonesia not to take out the dollar-equivalent amount
immediately but to stretch the amount over an eight-year period.
This would reduce total debt service for the country (equal
dollar demands) to some $25.8 billion in 1998."

De Koning continues: "When corporations are financially
healthy again with the help of some owners repatriating some
foreign assets, then economic growth could return, exports could
flow at higher levels, the rupiah could strengthen to more
reasonable levels, local prices could drop, foreign currency
loans could again become available to good companies, foreigners
would be willing to invest in the Jakarta Stock Exchange, and the
$25.8 billion would be easily serviceable."

Does de Koning imply that such a change in the state of
affairs (compared with the hellish situation now) could come
about in 1998 in spite of zero growth in the economy and a near
or imminent collapse in the manufacturing and service sector? If
it could bring about greater stability in the exchange rate in
the short run, it would be a worthwhile proposition.

The crucial elements of his scheme deserve proper attention.
If such a scheme could be implemented, short-term debts could be
converted into medium-term liabilities. That definitely would
lessen annual debt service obligations. The question is, who
would guarantee the original lenders for the eight long years and
at what amounts? The implicit answer is: Bank Indonesia, with the
consolation that "when corporations are financially healthy
again...etc." I do not think that the "the coordinating entity
which could be set up jointly between foreign banks and local
Indonesian companies to help organize the process" would accept
the risk.

The next question is: to what companies would the facility be
offered? There are hundreds, perhaps thousands of companies with
presently unserviceable short-term debts. But they would be
different in their viability under the new circumstances and in
the medium term. The consortium could sort that out, and not
everybody would be accorded the facility. But could the process
be implemented in a one or two month period of time? And how
would people with a vested interest and with political clout be
prevented from always cutting to the front of the queue?

The guiding principle should be equitable burden sharing
between foreign banks and creditors (who since the mid-1980s
aggressively pushed billions of dollars of loans down the throats
of hungry domestic companies), domestic debtors and, to some
extent, the government and foreign governments (such as in the
bank bailouts in the U.S., Mexico, the Scandinavian countries,
and perhaps soon in Japan and Korea).

A formula for equitable burden sharing would be immensely
difficult to devise, but it should be done lest foreign lenders
in the end lose everything. On the other hand, in the Indonesian
experience, government banks and the central bank have often
become the fall guys in the end.

It would be impossible for the government to try to keep all
private businesses afloat while facing their debt service crunch.
It would also be morally questionable if it did try since the
business practices of some of these companies contributed to the
currency crisis in the first place.

De Koning's idea could be applied, first of all, to our
private sector banks. Their outstanding debt pressure is much
smaller, perhaps in the order of $15 billion for 1998.

Because it is much less than the total debt service demand,
the pressure on the rupiah may continue to be severe. It would
take time -- perhaps more than three months -- to implement de
Koning's proposal to cover a substantial part of the total
private sector. We may not have that much time.

The writer is a noted economist and a former minister of
mines.