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Mr. Horst Kohler Managing Director International Monetary Fund Washington, D.C. 20431
Dear Mr. Kohler:
Despite many domestic uncertainties and a weaker external environment, the Government of Indonesia has made renewed progress in its economic program supported by an Extended Arrangement of the Fund. We have strengthened fiscal policies to achieve the original 2001 budget deficit target, and reestablished a base money path to contain inflationary pressures.
We have also taken further steps in the areas of fiscal decentralization, IBRA asset recovery and debt restructuring, and banking sector reform. These measures, and our policy intentions for the second half of this year, seek to recover momentum in our economic reform process. They are described in the attached Memorandum of Economic and Financial Policies.
We have met several of the performance criteria established for end-October and end-December 2000 under the program. However, a number of quantitative and structural performance criteria were not observed because of administrative delays and also because more time was needed to build a consensus for them. Thus, we seek waivers for the performance criteria on NDA (end-December 2000),FSPC referrals (end-October and end-December 2000), privatization of banks BCA and Niaga (end-December 2000) and completion of the special audits on government agencies (end- December 2000). The delays in these areas are being overcome in 2001. New quantitative performance criteria are now being proposed for end-September and end-December 2001 and end-January 2002 (Table 2), and additional structural benchmarks and performance criteria are being proposed for end-September, end- October, and end-December 2001 (Table 3).
During the remaining period of the arrangement, we will continue to consult with the Fund on future economic policies and in order to assess progress under the program and reach understandings on any additional measures that may be needed to achieve its objectives. The next review ofthe program will be completed by December 2001.
Sincerely yours,
Dorodjatun Kuntjoro-Jakti Boediono Syahril Sabirin Coordinating Minister for Minister of Finance Governor Economic Affairs Bank Indonesia
35.
Table 1. Indonesia: Macroeconomic Framework, 2000-01
(In percent) ----------------------------------------------------------------
2000 2001 ---------------------------------------------------------------- Real GDP growth 4.8 3-3.5
Inflation End of period 9.3 9-11 Average 3.8 10-11
Current account balance In billions of U.S. dollars 8.0 4.9 In percent of GDP 5.2 3 2
Gross reserves (in billions of U.S. dollars) 29.4 28.2 Central government balance (in percent of GDP) -1.1 -3.7 Revenues and grants 20.0 19.3 Expenditures and net lending 21.1 23.0
Base money growth * 16.1 12.5
* Years ended March 2001 and March 2002, respectively.
Table 3.
Indonesia: Structural Performance Criteria and Benchmarks, September-December 2001
End-September 2001
- Publicize the special audits and corrective action plans for the following enterprises: Garuda, Pelindo II, Jasa Marga, Telkom, Pt PN-IV. - Collect at least Rp 19.8 trillion in cash by IBRA (net of expenses).
End-October 2001
- Publish results of second round of ten OC reviews of IBRA's large restructurings. - Ahead of CGI meeting, review government budget in consultation with IMF/World Bank staff end adopt any additional measures necessary to keep the 2001 budget on track.
End-December 2001
- Begin primary auctions oftreasury bills. - In consultation with Parliament, conclude tender process for majority sale of Banks BCA and Niaga. - Finalize the burden-sharing agreement on BLBI credits between BI and the government, and resolve all outstanding concerns for BI and IBRA regarding the BLBI arrangements that affected the 2000 audit opinions. - Collect at least Rp 27.0 trillion in cash by IBRA (net of expenses).
Table 4.
Indonesia: IBRA Asset Recovery: FY2000 and Targets for FY2001 1
(In trillions of rupiah)
FY 20002 2001
Actual Jan-Jun Jul-Sep Oct-Dec Total
(Preliminary) Total net cash recpts 18.1 10.5 9.3 7.2 27.0 AMI (commercial assets) 2.4 3.1 4.0 3.6 10.7 AMC (loans) 14.4 6.9 3.9 3.9 14.7 BRU (bank equity) 1.0 0.0 2.0 0.3 2.3 Other (net)3 0.3 0.5 -0.6 -0.6 0.7 Bond receipts (AMC) 0.0 0.0 -5.5 4.5 10.0 Total recoveries (cash and bonds) 18.1 10.5 14.8 11.7 37.0
1 Data are on a cash basis.
2 FY2000 covers April to December 2000.
3 Other income net of operating expenses and other payments.
Attachment 1
PRINCIPLES FOR IBRA'S CORPORATE DEBT RESTRUCTURING
Preamble
The following core Principles will henceforth guide IBRA's corporate debt restructuring. They are designed to promote economically viable restructurings, which are key to sustained economic recovery and a reduction in unemployment. The Principles aim to create a transparent process that will maximize recoveries for the government. To this end, the Principles recognize that borrower must repay to the maximum of their ability and they should personally guarantee their company's debts. The Principles also recognize that IBRA and other creditors must be able to take necessary steps to ensure that enterprises which remain debtors to the State are operated in a safe and sound manner in the public interest and cannot be misused by fortner owners to promote their own interests. For this reason, the majority of equity in large restructured enterprises will normally be provided to creditors, including IBRA.
The principles will be applied, in collaboration with any other creditors, in a nondiscriminatory manner to all of IBRA's large debtors, including the 21 largest obligers as determined by IBRA. The restructuring of all large IBRA cases1 -- including all cases with MOUs for which final restructuring agreements have not been legally closed -- will henceforth be reviewed by the Oversight Committee of IBRA to assess their conformity with these Principles.
The ultimate decision on all restructuring proposals above Rp 1 trillion will as in the past be made by FSPC which will make public any deviations from the Principles set out below.
1. IBRA's Role: Preparation of Restructuring Proposals
Restructuring plans proposed by IBRA for all large debtors (as defined above) will be based on an independent, professional assessment of the future viability of the enterprise and estimates of the level of sustainable debt, and will be conducted by a third party professional approved by and reporting to IBRA. The assessment will be based on a full legal and financial due diligence, and will include an independent review ofthe company's business plan, along with its underlying projected balance sheet, profit and loss, and cash flow statements. The assessment will explore all options for recovery, including the sale of loss- making and/or noncore units, or dissolution if the company is found not to be viable.
Sustainable debt will be rescheduled on market terms, nonproductive assets sold and the remaining debt converted into quasi-equity (normally long-term convertible bonds) and equity. IBRA will attempt in negotiations with debtors to extract the maximum in cash or other assets as payment and thereafter would maximize the use of convertible bonds or other quasi-equity instruments that require periodic coupon payment. Quasi-equity instruments will retain upside potential for Il3RAby providing IBRA with a right to redeem and/or convert the instruments if there is improvement in the performance or value of the company. With regard to equity, IBRA, together with other creditors, will in every case initially assume a majority position. This equity position is envisaged to be of a temporary nature and will be used to protect and ensure ultimate recovery of remaining debts to the State.
Through its position as creditor and quasi-equity holder, IBRA will assure its entitlement to: control cash flows (through cash flow sweep mechanisms, escrow accounts into which all cash receipt of the debtor must be placed, etc.); accelerate debt repayment from excess cash; appoint a Financial Controller and/or Financial Directors; and set company and management performance targets. In those cases where IBRA holds less than the necessary equity share under the company law, it will secure agreement with other shareholders to allow IBRA (together, if necessary, with other creditors) to effect key operational restructuring decisions, such as sales of major assets. Where IBRA is not a majority creditor or shareholder, it will seek to secure the agreement of other creditors and shareholders for the controls described above.
IBRA will normally negotiate restructuring agreements in a collective framework involving other creditors and will ensure prior to assuming a quasi-equity or equity position in a restructured companyDthat similarly placed creditors have agreed to similar restructuring terms.
2. Role of Former Owners and Managers
Former owners should pledge personal guarantees to cover the sustainable debt and any quasi-equity held by IBRA. The equity share of the former owners in the restructured company will be limited to a minority holding. Within this limit, the equity share will be commensurate with the share of total debt that is estimated as sustainable. Thus, the former owners' initial equity stake would not exceed the share of sustainable debt to total debt unless former owners inject new cash resources or unencumbered assets into the company, or bring special expertise that enhances the value of the company. Former owners may be allowed to retain a management role in the restructured enterprise, if they are found to be cooperative and of sound integrity. As a safeguard, former owners and managers will be subject to performance-based contracts, reviewed annually by IBRA's independent auditors, and linked to restructuring targets.
3. Independent Review: Roles of IBRA's Oversight Committee and the FSPC
In line with the IBRA Oversight Committee's founding decree, the FSPC on March 29, 2001, instructed the Oversight Committee to conduct an independent review of each restructuring transaction above Rp 250 billion that has not been legally closed and that involves single obligers with outstanding debts to IBRA of Rp 750 billion and above (Attachment 1 in the published version). The Oversight Committee has been provided with a sufficient additional budget to carry out this task and will be assisted in each of the reviews by independent restructuring professionals.
A timetable for the reviews (Attachment 2 in the published version) has been prepared and agreed with the Oversight Committee. As a first priority, reviews will take place for those cases where MOUs have already been considered by the FSPC. For all new cases, reviews will be carried out as soon as IBRA formulates a debt restructuring proposal. The result of the Oversight Committee's review will be submitted together with IBRA's Executive Committee recommendation to the FSPC. The Oversight Committee's recommendations will be nonbinding.
The Oversight Committee will effect annual ex-post reviews of those restructuring agreements previously reviewed by the Oversight Committee to ensure that implementation of the agreements is in line with the original objectives, and will advise IBRA and the FSPC of its findings.
4. Future Roles of IBRA and MoF
IBRA's tenure will expire in February 2004. During the remaining period, IBRA will not increase its loan exposure, or provide any further guarantees, directed credits, or other subsidies to restructured debtors. Where possible, IBRA will sell any debt instruments, quasi-equity, or equity it has acquired in restructured debtors prior to its sunset date. Rights and responsibilities for any remaining restructured debt, quasi- equity, or equity holdings created by the restructuring will be transferred to the Ministry of Finance upon termination ofIBRA's existence.
5. Full Disclosure
Following approval by the FSPC of an MOU or a final restructuring proposal, the FSPC will make full public disclosure of the rationale used and the broad terms of the restructuring, for all large IBRA cases. Should a restructuring proposal have been approved even though it does not accord with these Principles the rationale used is to be fully disclosed by the FSPC.
The findings of the Oversight Committee's review will also be made public by the FSPC. Likewise, IBRA will be responsible for public disclosure of the smaller debt restructuring agreements.
Jakarta April 4, 2001
1 The Oversight Committee will review all cases for single obligers above Rp 750 billion, with the exception of restructuring agreements, which cover less than Rp 250 billion in debt.