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.