Recovery vulnerable

Recovery vulnerable

President Abdurrahman Wahid's economic team should not take
too much comfort, let alone feel complacent, from the
commendation in the first few paragraphs of the latest annual
Indonesian review report by the International Monetary Fund for
what it called significant progress already achieved in
macroeconomic stabilization. On the contrary, the bottom line of
the Sept. 14 assessment mostly conveys a very strong warning of
vulnerability and raises great concern over uneven implementation
of reforms creating uncertainty in the medium-term outlook for
the nation's economy.

The vulnerability cited by the IMF are the very reasons why
market confidence remains fragile, most foreign and domestic
investors still wait on the sidelines, the rupiah's exchange rate
against the U.S. dollar is still 70 percent lower than pre-crisis
levels and the stock market index is languishing almost 45
percent below mid-1997 levels. Lingering uncertainty makes such
positive key economic indicators as the 4.0 percent growth in the
first semester, steadily increasing foreign reserves and
relatively low inflation as if meaningless to market sentiment.

The fact that the IMF felt it needs to stress several times
the imperative for strong political leadership for economic
reform measures indicates both inconsistency and laxity on the
part of the government in the implementation of several key
programs. The IMF especially did not hide its utter
disappointment over the very slow pace of asset recovery and
corporate debt restructuring.

Though the review did not go into such details as to cite
instances of inconsistency, one can easily observe such paradoxes
in the manner in which the government deals with the largest
debtors and prepares the privatization of state companies.
Measures that initially looked forceful to compel some
recalcitrant debtors to negotiate in good faith suddenly faltered
without clarifications.

For example, the status of the 1998 Master of Settlement and
Acquisition Agreements with several the largest debtors now
remains uncertain because the government has yet to act on its
plan, announced a few months ago, to review the deals. Further
delay in this area would certainly affect asset sales while the
assets ceded by debtors under the agreements to settle their
obligations are actually the most attractive to potential buyers
or investors because they consist mostly of functioning
companies.

Many analysts see the approach pursued by the new economic
team in dealing with the largest debtors as too lenient and
accommodative towards the businessmen's interests. Some analysts
even raised concerns that such a soft approach could lead to
collusive deals because the process is not transparent and the
treatment is discriminative and individual in nature.

The government seems not fully aware of the urgent need for
quicker debt resolution. Now, almost three years after the crisis
erupted, most corporate bad debts, foreign and domestic, totaling
around US$100 billion, remain unresolved.

It is not an exaggeration to say that insofar as the huge
corporate debt overhang remains unresolved, the business sector
will remain hostage to uncertainty because the thousands of
middle and large-scale corporate debtors are deprived of access
to new credit lines. This condition will endanger the
recapitalized banks as they will not have enough credit-worthy
corporate customers. New lending will therefore be limited to
consumer loans and credits to small enterprises which obviously
will not be able to generate sufficient earnings for banks to
cover their costs. Unless the banking industry gets stronger,
the economic risk of doing business in the country will remain
unusually high. This risk, combined with the lingering political
uncertainty and very weak law enforcement, makes the nascent
economic recovery highly vulnerable.

Prolonged delay in corporate debt restructuring will create a
potentially devastating impact on fiscal sustainability because
the interest burden of the Rp 624 trillion (US$71 billion) in
treasury bonds issued to recapitalize banks and reimburse
creditors and depositors under the government deposit guarantee
scheme will consume the bulk of state revenues, leaving only a
paltry sum for infrastructure investment. More worrying is the
dreaded possibility of the government falling into default when
some Rp 130 trillion of the bonds are due to be redeemed in 2003,
the same time that the government will have to resume repaying
foreign debts to sovereign creditors.

Averting such a catastrophe requires President Abdurrahman to
provide stronger leadership to the programs of asset sales,
including the privatization of blue-chip state companies, to
raise additional revenues, and to debt restructuring. An
accelerated debt resolution will enable the government to retire
early a sizable portion of the treasury bonds currently held by
banks by exchanging them with current performing loans.