JITF may not reach $10b corporate debt restructure target

By Reiner S

JAKARTA (JP): The Jakarta Initiative Task Force (JITF) may not reach the government target to restructure around US$10 billion in corporate foreign debt by the end of this year.

In a hearing with the House of Representatives commission IX on banking and state budget last week, Bank Indonesia revealed that JITF had so far only managed to restructure some $5.3 billion of foreign debt.

With only around two months to go, it is hard to imagine how the task force could meet the target particularly with persisting unfavorable macroeconomic and political conditions.

Government and JITF officials have admitted that the current exchange rate level of the rupiah is not favorable to push debt restructuring deals.

The exchange rate of the rupiah against the U.S. dollar has been hovering at near the Rp 9,000 per dollar level versus the Rp 7,000 per dollar government target for this year. The local currency has been under pressure due to continuing concerns over domestic political developments and controversy in several key economic programs as well as external factors.

But a failure in the debt restructuring front could also become a major factor in pulling the rupiah further down.

A success in the restructuring of dollar-denominated debt will help reduce the demand for dollars, thus contributing to easing the pressure on the local currency.

According to Bank Indonesia, the country's private sector foreign debts due in the fourth quarter of this year were estimated to reach more than $9.2 billion.

The restructuring of the corporate debt is also crucial to help revive investors confidence in the economy and to help resume capital inflow.

JITF was formed by the government in 1998 to help accelerate the debt restructuring process of the country's private sector. But the task force only plays a mediator role in assisting creditors and debtors to reach restructuring deals.

After the country was hit by the regional currency crisis in the middle of 1997 which sent the rupiah tumbling, most of the local corporations which borrowed heavily in dollar-denominated loans both from local banks and foreign creditors suddenly faced difficulties in repaying the debt.

According to a paper prepared by the World Bank for last week's Consultative Group on Indonesia (CGI) donors meeting in Tokyo, Indonesia's corporate debts including those owed by state- owned enterprises and small to medium-sized companies totaled $119.7 billion.

The Bank said that $58.4 billion or around 49 percent of the total debt was owed to foreign creditors, and another $5.6 billion debt was raised through the issuance of notes.

This category of debt is the target of the JITF because the debt involves foreign creditors.

The remaining amount of the debt is owed to local banks either state banks, private banks or banks under the Indonesian Bank Restructuring Agency (IBRA). The agency is mandated to restructure the corporate debts owed to local banks.

A senior official at the JITF said that one of the difficulties in reaching a restructuring deal is the fact that more than 70 percent of the overseas debts that must be "settled" via JITF were owed by publicly-listed companies.

"The restructuring process must follow the capital market ruling. This is not a simple thing," he said.

He said that the mediation schedule for this type could take up to six months or even more depending on the complexity of the case.

The JITF use the carrot and the stick approach to help accelerate the restructuring process.

The carrots include a tax incentive facility for cooperative debtors. An indebted company whose restructuring process includes a debt hair cut should pay tax because the company theoretically enjoys a gain.

For listed debtors, the Jakarta Stock Exchange has also agreed to protect the companies from being delisted within a certain period of time.

But JITF also imposes sanctions on uncooperative debtors including transferring them to the Attorney General's Office for possible legal sanctions.

Uncooperative debtors can be defined as those who have agreed to enter the JITF mediation process but had failed or declined to attend scheduled meetings with creditors.