Success of foreign debt relief hinges on domestic debt

JAKARTA (JP): The success of the overseas debt relief scheme supervised by the Indonesian Debt Restructuring Agency (INDRA) hinges on resolving the problem of domestic debts, according to a Bank Indonesia director.

Miranda Gultom said yesterday that solving the domestic debt problem was a key step toward dealing with foreign debt because foreign creditors would be unwilling to join the debt relief program if local banks did not make a simultaneous effort to help indebted companies.

"I've been approached by international banks eager to participate in INDRA, but they have all asked me about what is being done to resolve the issue of debt owed to local banks... they don't want to write off any of their loans if local banks are unwilling to do the same," she said at a seminar on the private sector overseas debt restructuring program.

INDRA is a government-sponsored agency which was set up to help resolve the private sector overseas debt problem by brokering debt rescheduling over an eight year period, including a three year period in which only interest is repaid, and providing debtors with foreign exchange at a reduced rate.

The agency became operational on Aug. 3 but no indebted companies have yet signed up to the program.

Local corporations are reluctant to enter the agency's debt relief program unless overseas creditors are willing to write off a significant portion of their debts.

Miranda said that Bank Indonesia was still seeking an appropriate way to restructure domestic debts and said the implementation of any such program would take time.

"Domestic debt restructuring is a must, but there is no quick fix," she said.

Efforts to resolve the domestic debt problem will focus on nurturing "viable" banks capable of financing the cash-strapped business sector. This will enable companies to repay their debts after they are once again returning a profit, she explained.

"The (domestic debt) problem cannot be resolved quickly because we have to reform our banking sector first," she said, adding that recapitalizing banks and dealing with massive non- performing loans presented the biggest obstacles to doing so.

She said international accounting firms are supposed to complete audits of all the country's domestic banks by the end of October, after which a program to recapitalize banks deemed to be viable would begin.

She explained that debtors who rely heavily on exporting and those who employ large numbers of people would be given priority in a planned program to deal with non-performing loans through a government-sponsored asset management company (AMC).

"But the AMC will need strong financial backing because of the large number of non-performing loans which have to be managed," Miranda emphasized.

Debt Relief

Meanwhile, Bank Indonesia director Dono Iskandar said that almost all of the 2,000 companies that have reported the extent of their overseas debts to the central bank would require some form of debt relief from their foreign creditors.

He explained that 300 companies had started to negotiate debt relief with their foreign creditors and expected to conclude deals by December and urged other companies to follow suit, adding that between 50 percent and 80 percent of existing debt would need to be written off.

"Many debtors have broken of communications with their creditors. That is not good," Dono said.

He explained that for companies to join INDRA, their creditors must agree to debt restructuring over an eight year period, including a three year period of grace in which only interest is repaid.

"If all companies participate in the scheme then I believe the rupiah will strengthen to Rp 4,000 against the dollar and all of our economic problems will come to an end," he said.

He pointed out that a lot of the pressure on the rupiah stemmed from a strong demand for U.S. dollars arising from the need to repay loans denominated in foreign currencies. Approximately US$33 billion of the private sector overseas debt falls due this year.

He explained that if companies joined the scheme and restructured their debt over an eight year period, including the three year period of grace, then dollar demand would plunge to an annual level of around $400 million.

The rupiah has recently strengthened to around Rp 11,125 against the U.S. dollar from more than Rp 14,000 earlier this month.

Dono said the rupiah strengthened as a result of a decision to roll over $2.9 billion in interbank foreign debts taken last week by foreign creditors.

"That is more than 80 percent of our interbank debts and is a significant achievement," he said, adding that the deal was part of the debt rescheduling agreement hammered out in Frankfurt in early June.

The debt was originally scheduled to fall due this year, but has been exchanged for maturities expiring over one year to four year periods, he said.

He explained that interbank debt of $3.2 billion was included in the Frankfurt agreement, not $6 billion as was previously stated.

"The earlier figure included interbank debts owed to the local branches of foreign banks which are not eligible for inclusion in the scheme," he said. (rei)