Indonesian debt difficult to handle, HK analyst says
Indonesian debt difficult to handle, HK analyst says
HONG KONG (Reuters): Indonesia's debt, the subject of International Monetary Fund talks in Jakarta this week, is expected to be much more difficult to manage than South Korea's.
"It was hard enough in Korea when they were able to work with banks that were more recognized," said John Seel, sovereign analyst with Bear Stearns in Hong Kong.
"How do you go about packaging Indonesia paper? It's much more difficult to price it than a government bond."
Meetings between South Korean officials and foreign bankers to refinance more than US$40 billion in short-term paper due by March 31 went a long way towards stabilizing the nation's financial markets, analysts said.
With the won gaining ground and foreign investors trickling back into Seoul's stock market, the banking talks and Seoul's pledges to implement economic reform appear to have taken the wind out of Seoul's financial storm, at least for now. Jakarta's situation is substantially different.
Not only are markets still waiting to be convinced of Indonesia's commitment to economic reform, mounting political uncertainty fueled by calls for President Soeharto to step down have made international bankers nervous.
In addition, Indonesia's private foreign debt burden of US$65.6 billion is spread among hundreds of corporations with issued paper of widely differing quality.
In South Korea, Seoul's tradition of policy-directed lending centralized bad debt within the banking system and among a smaller number of huge conglomerates.
This made coordination with international bankers much easier for Seoul than it would for Jakarta, analysts said.
"The main issue is how to (value) private sector debt that varies so widely in quality," said Seel.
The IMF arranged a $43 billion package of rescue loans for Indonesia in October and hopes to announce on Thursday a "very solid agreement" on the economic reforms that Jakarta will implement in return for the money.
Indonesia owes foreign financial institutions $118 billion in total. Government overseas debt amounts to US$52.4 billion while commercial paper and promissory notes and other paper amounts to US$15.3 billion.
South Korea, which has negotiated a US$58.3 billion IMF package, owes about US$153 billion overseas with US$80 billion of it short-term. Seoul is considering issuing government guarantees for some of this debt in order to meet demands from international banks for a longer-term solution to the problem.
In the meantime, foreign bankers have agreed to roll over US$40 billion in short-term debt for another 90 days.
But analysts said the same sort of deal would be extremely difficult to achieve in Indonesia.
"The international banks will try to establish some sovereign guarantees but I don't think it's the same situation as in Korea," said Chris Tinker, head of regional economics at ING Barings in Hong Kong.
First, the Indonesian government would have to agree to guarantee the debt, something it has resisted doing so far. Then, the foreign banks would want a guarantee for the Indonesian guarantee, probably from the United States.
"In Indonesia, the banks screwed up on their own. It was less a matter of policy and more of corruption. The government wouldn't want to take up responsibility for that," Seel said. And then there was the politics to consider.
Government guarantees for the ethnic Chinese community responsible for much of Indonesia's business activity could be problematic, and winning support in the U.S. Congress for any proposal backed by the U.S. Treasury, like the 1995 rescue of Mexico, would be extremely difficult, analysts said.
Seoul's strategic position cheek-by-jowl with the isolated, Stalinist regime in North Korea and the sheer size of the South Korean economy gave the United States much more motivation to help Seoul than it would Jakarta.
"And it'd be harder now than it would have been a couple of months ago," Seel said.
Indonesia's credibility was going to take a lot longer to return following the market routs of the past few weeks, even though the increased jitters could add to the temptation for people to provide guarantees to restore credibility quickly.
"But I'm still not sure that's a good idea, or that it would fly -- that you'd be able to sell it politically," said Seel. So what are the options?
Jake van der Kamp, equity strategist at ABN Amro Hoare Govett Asia, said there really is only one option in Indonesia -- a rollover and a huge writedown by foreign banks.
"This, in the end, is a private sector problem, and a lot of this comes down to foreign banks being too eager to lend money to foreign companies they didn't know enough about," he said.
"It's their fault, and they're going to have to take the loss."