Speed the sales of assets

Christopher Lingle, Global Strategist, eConoLytics.com, CLINGLE@eConoLytics.com

Indonesia has made painfully slow progress in its structural reform and its timetables agreed to with international lenders and donors have constantly been renegotiated or violated. A combination of high indebtedness and dubious corporate and political governance are harming the economy's future growth potential.

A poor credit rating prevails that causes companies and the government to pay higher interest rates on borrowing. On top of that, there is an"Indonesia discount" whereby stock prices of domestic companies are low compared to their peers in other markets because of a lack of corporate transparency and accountability. And this will prevail until there is more reform of the financial sector and debts of the corporate sector are sorted out.

Even though some financial institutions have achieved higher capital-adequacy ratios, too little has been done to sort out non-performing loans. Financial institutions need to do more to improve credit risk assessment and lending practices while being more aggressive about asset quality to force corporate restructuring.

While some monitoring of market activity may be needed to guarantee fair competition, there can be less government intervention by allowing markets to have a larger role in imposing market discipline. A market-oriented system will introduce pressures from shareholders and creditors combined with competition and the threat of bankruptcy will impose discipline upon companies.

Until there is privatization of the nationalized commercial banks, there will be further delays in bank-led restructuring of the corporate sector. And there should be less interference by the government in the management of banks to ensure that their actions are autonomous and meet global standards of operation.

Part of the delay has been prompted by a misguided fear that hasty disposal would allow foreigners to acquire valuable assets at "fire sale" prices. The error in this reasoning should be obvious.

First of all, it is better to have a short, sharp shock so that the system can begin to recover quickly. Secondly, low prices paid by private sources will relieve taxpayers of additional burdens and allow enterprises to become the source of tax revenues rather than a continuing drain on public coffers.

And the implicit economic nationalism that resists foreign purchase of distressed assets defies market logic. For these sales are a positive-sum game where both parties find themselves in improved situations. It is erroneous to present such divestments as a zero-sum game where the gains of a buyer are swamped by losses to the seller.

With the decision made to return assets held by Indonesian Bank Restructuring Agency (IBRA) to private control, it should be done sooner rather than later. Yet more delays are on the table that include offering improved terms for the debtors who squandered Indonesia's resources. This is a travesty on both accounts.

It would be better to give away all the assets rather than to leave them locked up in a non-productive condition. It is bad enough that capital is being withheld from a stagnating economy, but it is also certain that asset quality will continue to deteriorate due to depreciation.

As it is, taxpayers, especially those of future generations, must pay for the bank-restructuring program. One of the most pressing problems is Indonesia's exceptionally high public-sector debt. It turns out that the burden of public-sector debt per capita is almost double Indonesia's annual per capita GDP.

Prior to 1997, Indonesia's outstanding debts were less one- quarter of GDP.They now exceed 80 percent of GDP. Under the weight of this debt is a potential fiscal disaster that could occur in 2004 when a large proportion of existing government bonds will come to maturity.

Much of the public-sector debt was incurred from bonds worth Rp650 trillion (US$64 billion) to assist with bank recapitalization, equal to about half the GDP at the time. This made it the largest amount spent for bank bailouts by any country in the world. This process was monumentally mishandled and forced the central bank to a state of illiquidity.

Most of the bonds require repayment of principal within 5-7 years of their issue dates. Of the total, nearly Rp130 trillion is must be redeemed during 2003.

Interest payments on this debt are consuming a significant portion of the public-sector budget, with payments on interest and principal currently consuming about one-third of government revenues. During 2001, about Rp80 trillion in interest must be paid out to holders of bonds.

In the first instance, the endless political maneuvering must stop so there can be a restoration of confidence that the right political decisions can be made and implemented. Unfortunately, there is no indication that there is any responsible or strategic thinking on how to repay these vast sums, which are equivalent to about 65 percent of annual GDP.

Instead, there have been never-ending rounds of turmoil at Bank Indonesia and questions about the determination of the leadership of IBRA to sell off assets.

Indonesia's serious economic problems require hard decisions that must be made soon. To date, none of the past, present or prospective leaders have offered a vision of Indonesia's future. Instead of expressing concern for the well being of the citizenry, they seem more focused on their own bank accounts or providing favors for special interests.

It is important to break the cycle whereby legislators and members of the executive branch engage in internecine bickering or look after their own personal interests. Otherwise, the economic future of all Indonesians will be squandered.