The instrument of crisis management

The Indonesian Bank Restructuring Agency has a vital role to play to help fuel economic recovery through its loan restructuring programs to restore thousands of businesses to normal operations, and to sell thousands of operating companies to raise funds to lessen the budget deficit.

However, with less than 15 months to the end of its five-year mandate in February 2004, IBRA has yet to dispose of almost 50 percent of the Rp 650 trillion worth of bad loans and equity shares it took over from closed and nationalized banks.

The recovery rate in its asset disposal program also has mostly been lower than expected due to a combination of poor sale management, corrupt transactions and inimical macroeconomic and political conditions, which have steadily eroded the value of assets IBRA holds.

IBRA's contribution to the state budget from the proceeds of its asset sales will decline sharply next year because most of the best assets (both in terms of financial prospects and legal documentation) had been disposed of over the past three years.

The 2003 state budget, for example, stipulates only a net revenue of Rp 12 trillion it expects from IBRA, compared to more than Rp 42 trillion this year.

But IBRA's corporate debt restructuring is still key to reinvigorating economic activities as companies that are hostage to their bad debts will remain closed to credit lines and therefore unable to raise production rates. This condition will deprive banks of creditworthy borrowers to plow their excess liquidity and will force them to rely mainly on the interest revenues from their government bonds.

The sale of the distressed assets is also vital as only new, credible investors will be able to reinvigorate these businesses by bringing in better management and fresh capital.

The divestment of nationalized banks is equally crucial because almost all the largest banks are now majority owned by IBRA. As long as these banks remain under IBRA control, they will remain fragile, unable to fully regain the market's confidence.

Accelerating the operational restructuring of these banks is now more urgent as the government will begin phasing out its blanket guarantees on bank deposits and claims in January.

The government, with full support and effective oversight from the House, should enable IBRA to firmly exercise its mandate, both accountably and transparently. --JP