Slow debt resolution

The Indonesian government's decision to hire 20 more foreign experts on debt restructuring next month shows how frustratingly slow the process has been to resolve the US$67 billion in corporate foreign debt and more than Rp 300 trillion (S$37.5 billion) in over-hanging domestic debt. Thus far only $2.5 billion and Rp 1.9 trillion in bad debts have been restructured, although a resolution of the huge debt problem is one of the keys to economic recovery.

The progress, achieved about nine months after the establishment of the government-sponsored Jakarta Initiative Task Force to facilitate out-of-court settlement of debts, is a real pittance. One could imagine how much longer it would take to wholly resolve the huge private sector debt, the key to reopening the international financial market and domestic credit lines to Indonesian companies.

Most debtors have simply stopped servicing their debts, citing the collapse of the rupiah as a force majeure to justify their laid-back attitude. Realizing that the unilaterally declared debt moratorium would jeopardize the whole economic stabilization and recovery program, the government decided in September 1998 to set up the Jakarta Initiative as a scheme to facilitate debtor- creditor negotiations. Debtors agreeing on restructuring their debts under the scheme are given exchange rate protection under the government-sponsored Indonesian Debt Restructuring Agency.

To prod debtors to negotiate with creditors in good faith, the government strengthened the bankruptcy law and set up a commercial court last July to expedite insolvency proceedings.

This more credible insolvency system did prompt more debtors to negotiate with creditors. The Jakarta Initiative said last week it was now facilitating negotiations involving $20.8 billion and Rp 11.6 trillion in debts owed by 181 companies.

More debtors have increasingly realized that unless their bad debts are resolved their fate will hang in the balance. No domestic or foreign creditor and supplier will touch them. Deprived of working capital and shunned by other companies, they will sooner or later become bankrupt anyway.

However, debt restructuring is a very complex process involving a lengthy examination of a debtor's strengths and weaknesses and a design of a sensible business plan and reasonable balance sheet. Predicting cash flow even for one year ahead seems rather impossible given the messy business climate and political uncertainty, let alone for eight years-- the minimum maturity for debt rescheduling set under the Jakarta Initiative.

Here, we think, lies the importance of the expertise to be brought in by the 20 additional international experts who will be assigned to the Jakarta Initiative Task Force. The fact is debt restructuring actually is synonymous to corporate restructuring, which is completely new to Indonesian business culture but is sorely needed to reinvigorate the crippled business sector and to enhance good corporate governance.

However, debtors should negotiate in good faith, meaning they should be fully honest and transparent about their true condition to creditors. Restructuring, either by debt rescheduling or a debt-for-equity swap, still gives a fair chance for debtors to revive their business to robust growth within a few years to come and for creditors to recoup a good portion of their loans. But a bankruptcy suit surely leads into business liquidation at the expense of both parties.

PT Astra International is a paragon of a good debtor. This group has finalized agreements with almost all its foreign creditors, including Japanese bankers well-known as the toughest among them, who praised the honesty and transparency with which the management presented business plans for debt rescheduling. Debtors also should not hesitate to cede majority ownership of their companies in case debt-for-equity swap is the best method for resolving their debts. Bakrie Brothers is a case in point. This group prefers losing controlling ownership to foreign creditors but still maintains a good reputation and trust of international and domestic businesses.

On the other hand, though, foreign creditors are required to show a good understanding about the woes faced by their clients. They should not indiscriminately insist on recovering fully all credits and interests due but be reasonable in the valuation of their debtors' assets. Forcing debtors to surrender assets at fire-sale prices could cause a nationalistic backlash. Both debtors and creditors who in the past shared the benefits of their deals should be willing now to share losses.