Success of foreign debt relief hinges on domestic debt

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)