New Indonesia pact still leaves creditors waiting

New Indonesia pact still leaves creditors waiting

HONG KONG (Reuters): Indonesia's new agreement with the International Monetary Fund offers little cheer to foreign creditors waiting to be repaid by the country's borrowers, financial sources said yesterday.

"People are getting a little jaded by Indonesia. I don't think anyone was paid in the last week from Indonesia and companies aren't even paying their rupiah debt," said a fixed-income fund manager in Hong Kong.

"And what can people do? There is really no legal structure in Indonesia for people to get their money," he said.

According to Bank for International Settlement figures, outstanding loans to Indonesia from major international banks were US$58.7 billion by the end of June 1997.

Unlike in Korea, where borrowing tends to be concentrated among a handful of banks, there are many Indonesian borrowers and many of these are corporations.

In a letter of intent signed with the IMF, Indonesian President Soeharto drastically revised the economic assumptions presented in the recent budget, agreed to cut subsidies on fuel and other commodities and promised to cut key monopolies, some of which favored his children.

The Indonesian government also reiterated that it would not bail out its debt-ridden companies. Instead, Indonesian firms are expected to muddle through as they have been, paying debts when they can and restructuring or rescheduling when they can't.

Bankers said that many Indonesian firms, burdened by a sharply depreciating currency, have not been able to pay.

"Most of the reform measures were expected," a senior analyst at Nomura Securities in Tokyo told Reuters. "What really is shocking is that (Soeharto) said the government will not bail out the private sector debt."

Japan banks hold some US$23 billion, or 39 percent, of Indonesia's debt, according to the BIS.

But John Seel, sovereign analyst at Bear Stearns in Hong Kong, said Soeharto was right to steer clear of guarantees.

"That's been one of the better parts of Indonesia's policy all the way through this," said Seel.

"I think they are happy to let companies default and work things out with their creditors, which is not great but it is better than having the government take on those obligations or declare a debt moratorium," he said.

While Japanese banks are most heavily exposed to Indonesia, many analysts said they are more worried about the exposure of the troubled Korean banking sector.

Unlike Japanese banks' exposure to Indonesia, which tends to be in the form of loans to local subsidiaries of Japanese firms, analysts said most Korean bank loans were made directly to Indonesian entities.

"I think the exposure of the Korean banks is huge. The Koreans were extremely aggressive around Indonesia in the last two years, whereas the Japanese were very aggressive four years ago. And a lot of the debt is short-term," said the Hong Kong fund manager.

Bankers said one effect of Indonesia's debt woes is the growth of a distressed debt business in Asia.

"A lot of banks, including the Japanese banks, want to dispose of this kind of distressed debt because if they carry it on their balance sheets they have to fund it at a premium," said a syndicate manager at a European bank.

He said that while Asian defaulted debt isn't really traded, there are investors willing to take it with the expectation that at least some of it will be repaid in future.