Speed the sales of assets

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.