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.