Private borrowers need debt rescheduling

Private borrowers need debt rescheduling

The government and major private companies is holding a road
show to creditor countries to seek the rescheduling of the
private sector's foreign debts. Economist Faisal Basri discusses
problems related to the foreign debts owed by private firms.

Question: Do you think the road show will help?

Answer: It will help because the government's concern on debt
rescheduling will function like a guarantee. But creditors who
face liquidity problems due to economic crises hitting their own
countries, such as Japan and South Korea, will not be able to
roll over their loans. They will even demand the acceleration of
loan repayment.

Q: How big is the portion of the domestic borrowers' debts from
Japan and South Korea?

A: As far as I know, Japan has provided total loans of about
US$20 billion for Indonesian companies and South Korea another
$12 billion. That is a major part of the private sector's total
offshore borrowing of $65 billion as of September.

Q: How did the private debt increase so rapidly surpassing the
government's foreign debt of only $52.3 billion?

A: Along side the change in trends in the global flow of funds,
the government played an important role in the rapid increase of
the private sector's foreign debt. Some protectionist measures
established by the government, such as the introduction of
protection tariffs on chemical products similar to those
manufactured by PT Chandra Asri, for example, have made
businesses in Indonesia very attractive to foreign creditors.

The State Electricity Company's (PLN) guarantee to buy
electricity generated by private power firms has also attracted
foreign creditors to provide loans for them.

Meanwhile, the global trend indicates that international flows
of funds are now dominated by the flow of foreign direct
investments, followed by investments in bonds and stocks, and the
flow of commercial loans for banks. Ten years ago, the flows of
funds were dominated by the flow of commercial loans, followed by
loans and grants for governments, then direct foreign investments
and other loans and capital, including bonds and stocks.

Q: Will the private sector's borrowing increase or decrease?

A: I'm afraid the borrowing will increase further. Even though
the government has rescheduled some of its development projects
due to the monetary crisis, it has allowed private companies to
go ahead with their multibillion-dollar oil refinery projects.

Businessman Bambang Trihatmodjo, for instance, is constructing
a $3.2 billion oil refinery in Situbondo, East Java, while tycoon
Probosutedjo will construct another refinery worth $2.5 billion
in East Java.

Such projects will increase Indonesia's foreign debt and, in
turn, will increase the country's current account deficit.

Since these projects are related to the government -- their
fuel products will be sold to the state-owned oil company
Pertamina -- their construction should be rescheduled.

The continuance of these projects will affect business
confidence in the country.

Q: How many borrowers will need their debts to be rolled over?

A: About half of them, particularly those whose with huge debts.
In normal conditions, these companies can repay debts with new
borrowing by selling commercial papers and promissory notes. But
because liquidity is very tight, they will not find buyers for
their commercial papers and promissory notes.

Q: Do domestic borrowers have to pay more money in rupiah given
the sharp depreciation of the currency against the U.S. dollar?

A: Yes, for most of them because realizing that the rupiah used
to depreciate by less than 5 percent per annum before the start
of the monetary crisis in July, they did not hedge their debts,
which were mostly denominated in dollars even though they were
owed by Asian countries.

Q: What measures should the government take to help domestic
borrowers avoid future financial problems?

A: In the longer term, the government needs to establish a
competition policy to encourage private companies compete against
each other through operational efficiency. In such a condition,
only highly competent companies have the courage to generate huge
borrowing.

In the shorter term, Indonesia should further develop its debt
instruments which are tradable on the secondary market, so that
companies will find it easier to raise loans whenever they are
facing financial difficulties. (riz)