Rupiah increase unlikely to spur debt repayment

Rupiah increase unlikely to spur debt repayment

SINGAPORE (Reuters): The recent strengthening of the Indonesian rupiah against the U.S. dollar is still not enough to encourage corporate debtors to begin repaying debt obligations, analysts in Singapore said on Thursday.

The rupiah hit an eight month high of 6,975 per dollar this week -- a 50 percent improvement from levels of over 11,000 just three weeks ago.

The rise came largely as a result of central bank selling dollars into an almost totally illiquid market, according to traders.

Analysts say although Bank Indonesia's primary objective has been to get a stronger, stable exchange rate to allow room for interest rate cuts and economic recovery, it would be a bonus if it also served to reignite the stalled debt restructuring process.

Indonesia and its creditor banks struck a deal in Frankfurt in June for a comprehensive program of restructuring to cover an estimated $80 billion of private sector debt.

Under this deal, called "The Frankfurt Plan", private debtors can restructure external debt over eight years with a three year breathing space in which only interest needs to be paid.

To help in this process, the Indonesian government also set up a Debt Restructuring Agency (INDRA) in August. Under the INDRA mechanism, private sector companies can pay monthly interest and principal obligations in rupiah to the agency which then pays back foreign creditors in foreign currencies.

"So far there has been almost no response to the Frankfurt Plan from the corporate sector," said Chia Woon Khien, head of Asian Research at SEB in Singapore.

"With the rupiah around 7,000 it is still too tough for the private sector to meet debt repayments." she said. "Anything above 5000 is a bit too tough."

"With USD/Rupiah at 6,000 few companies will still be able to afford significant debt repayments," noted Desmond Supple, head of Asian currencies research at Barclays Capital.

Indebted Indonesian firms and their creditors are due to meet in Jakarta on November 2 and 3 to try to draw up a further debt restructuring plan following the launch of the so called "Jakarta Initiative" by the government last month.

Market watchers in Singapore say this debt initiative could involve a greater degree of debt forgiveness by creditors than in past deals, but would still require Indonesian corporates to resume some form of debt repayment.

Recently in Jakarta Indonesia's chief economics minister Ginandjar Kartasasmita said he expected the meeting to result a reduction in companies' debt obligations.

"Without such an agreement at this stage, all debtors would not be able to repay their debts," Ginandjar said.

But analysts are wary that much can change with the rupiah at current levels, with some saying there is also a strong corporate culture against repayment. "Companies which are trying to meet their debt obligations are often seen as having weak management by their peers in Jakarta," said one analyst.

"It's going to be a bit hard to encourage debt repayment at current levels. It (the rupiah) would have to go below 5,000 to make it worthwhile anyone even contemplating it," said Andrew Fung, regional treasury economist at Standard Chartered Bank.

Meanwhile in Washington, the International Monetary Fund's top official in Asia said Thursday he is "cautiously optimistic" about prospects for economic recovery in Indonesia.

Hubert Neiss, director of the IMF's Asia Department, said he was "encouraged" by the appreciation of the Indonesia rupiah, although he attributed the rise partly to the yen's rise against the U.S. dollar.