Unresolved banking crisis will become a time bomb
Unresolved banking crisis will become a time bomb
Muhammad Chatib Basri is a lecturer in economics at the University of Indonesia, Jakarta, who is currently completing his PhD at the Australian National University in Canberra.
The following is a telephone interview with the economist, who is also a columnist in several leading publications in Indonesia, conducted by our Melbourne-based contributor Dewi Anggraeni.
Question: It appears that the government is becoming increasingly powerless in facing conglomerateurs who have huge debts. For instance, the government has again postponed the deadline for MSAA (Master of Settlement and Acquisition Agreement) debtors to submit more assets. What is happening?
Answer: I see a very big and complicated problem; one that is related to the country's judicial reform. Take Bankruptcy Law. It is in place, in operation, with appropriate judges. Yet so far whenever IBRA (Indonesian Bank Restructuring Agency) has submitted bankruptcy cases against insolvent companies, it is the insolvent companies who have won.
So the crux of the problem is in judicial reform. It is no longer a secret that the existence of a court mafia makes it easy for those companies to win if their cases ever hit the court. Unfortunately, the companies cannot be declared bankrupt if the cases are not processed and finalized in court. That is why debt restructuring is such a difficult task in Indonesia.
Of course there is another option, which is out of court settlement. So if the government sees that taking the companies to court will get it nowhere, it can settle the cases out of court. However, this puts the government, in this case IBRA, in a much weaker position, and gives the conglomerateurs big bargaining power. So IBRA would ask, instead of 100 percent repayment, a much lower percentage, because it would still be better than nothing, as may be the case if they went to court.
Q: So that was the reason the Coordinating Minister Rizal Ramli offered big discounts to the debtors?
A: That is correct. The legal process is so complex and difficult, that in his frustration, Faisal Basri suggested that foreign judges be invited to serve in our courts.
Let us have a look at some figures. The bankruptcy law came into operation in 1998. By 1999, only one-fifth of the 130 cases processed were awarded to the creditors. The rest went to the debtors. So people quickly got the picture. Out of court settlements are the lesser of the two bad options.
That is what the government is facing as well.
Q: That means the government is being held to ransom?
A: That's correct.
Q: What has IBRA achieved so far then?
IBRA has achieved quite a lot, for instance, in asset recovery and recapitalization. However the process has been much slower than expected; yet the government is running against time. The problem is, if the restructuring is not done in time, it is very likely that banking recapitalization will have to be done from the beginning, once again.
Q: Why is that?
A: The banking restructuring is now done, and the banks are now recapitalized, with a minimum Capital Adequacy Ratio (CAR) of 4 percent. That has been achieved. In the meantime, the insolvent companies who remain insolvent and yet not bankrupt, have a detrimental impact on their banks, because they still have debts with the banks but are not paying. So the banks cannot expand because they cannot lay their hands on the cash owed to them. If this goes on, it may push the CAR lower, requiring the government to inject more cash into the banks. Where would the government get the money from for this second banking recapitalization? The demand on the budget is already too high.
Q: What about from selling bonds?
A: In the long term, selling bonds will cause more problems, because bonds are the government's debt to the people.
Q: So is the government trapped in a dead-end?
A: In a vicious circle. If the banks are restructured and recapitalized, yet the conglomerateurs' companies' debts are not paid, the banks cannot expand, the CAR will be pushed down, and another recapitalization will be needed.
If the companies pay up but the banking sector is still in a mess, there won't be any credit flow. So the ideal solution is to fix both ends, banking recapitalization and debt restructuring. But debt restructuring faces a big stumbling block, which is the lack of judicial reform.
Q: So we are lumbered with corrupt judges?
A: That is a public secret. How can you explain a situation where a person who borrowed from someone gets away with the money with impunity while the lender is left with the damage?
Even the IMF didn't expect it. They were used to countries with workable institutions. They expected normal proceedings, where if you have a debt and are not paying, they take you to court and you are declared bankrupt then your assets are confiscated. Yet in Indonesia it is the debtors who won the cases.
Q: Do we need a demarcation between government and state institutions?
A: That is correct. I like that observation. If I can offer my description of the situation, it is as if we have an economy that operates using sophisticated instruments, approaching the Wall Street era, yet our social, legal, and political structures are still left behind in Jurassic Park. So there is a huge mismatch.
Q: What can we rely on now, then?
A: We cannot very well say that our economy is completely destroyed. If we look at the indicators, the growth in export, 3.9 percent, is good. Inflation is under control. Consumer spending is up.
In other words, in the short term, we are okay.
One of the most immediate problems I can see is, if we cannot overcome the banking problems quickly, it will become a time bomb in the next few years. Let us use Mexico for comparison. When Mexico came out of its first crisis, its fragile banking sector pushed it into a second crisis.
This is what worries me might happen with Indonesia. We may be able to fix the present problems without really curing the illness. We may see economic improvement as shown by the usual indicators, but we don't know if it is sustainable at all.
Q: Are you saying that if we had a second crisis, it would be worse?
A: Yes, much worse. So the government has to handle the private sector's debt carefully and thoroughly.
As you know, IBRA wants to sell the assets recovered from the debtors, but they are faced with the option of waiting for the right time and the right price, or selling them at sale prices. These are not very good options, obviously.
If IBRA waits too long the economy will deteriorate quickly, while it is not known when the right time and price will come.
It would be better to sell them to businesses who needed them to get the economy going, whereas in the hands of IBRA they would lie idle. If IBRA sells them quickly but at low prices, foreign investors might come and buy them for as low as 20 percent of the original value. Either option has a price.
Q: What would you do?
A: My assessment is, we cannot afford to keep waiting. Our objective should not be getting the highest price, but getting the economy going again. The IMF also prefers IBRA speed up the sale of recovered assets.
However this also entails its own dilemma. If this is done, it is inevitable that foreign investors would buy big. Then we are very likely to face a nationalist backlash. Would we be able to accept that our companies are bought by foreigners at very low prices?
Q: There have been reports that some former owners are trying to buy back their assets at largely discounted prices...
A: That is right. This has touched people's sense of justice. But technically it is not hard to do. Supposing there is law against former owners buying back their assets. When the assets are sold to the public, the former owners can use a particular agent to buy them. Then the former owners will buy them from the agent, still at much lower prices than their original value.
Q: Are we still very dependent on foreign investors to get our economy going again...
A: I think so. Let us say that we finish up having a second banking recapitalization, who is going to extend the cash? The government won't be able to afford it. Domestic investors have just begun again, they won't have the kind of money for that. So we just have to rely on foreign investors. However, the foreign investors naturally might try to push the prices further down.
We also need certainty in law and regulations. As we know, one thing Gus Dur's government is well known for is its consistency in being inconsistent. If I were a foreigner with investment aspirations, I would first see the country's rule of law, so that I would know what to plan and how to plan. But if the regulations change every three months, how could I plan my strategy? I would retrace my steps and wait.
This also happens in our banking sector. People look at Bank Bali irregularities, where some cash has allegedly finished up in Golkar's coffers, and understandably shrink back.
Q: CGI (Consultative Group on Indonesia) has approved a new loan of US$4.8 billion and a grant of US$500 million. Is it good news or bad news?
A: It is both good news and bad news. The good news is, it is going to be of great help fiscally, in the short term. We hardly have a choice. Our three conventional sources of income are oil, taxes, and privatization of state enterprises.
Now, oil is still good, as the price is good at the present. But we can't expect too much from taxes in present circumstances. And privatization of state enterprises is not going very well. So we can only pin our hopes on oil.
In the meantime, expenses are huge. We have recapitalization, public service salaries, interest on debt, and others. All these expenses have to be met. So in the short term, yes we do need that loan. However do we need US$4.8 billion? It is debatable. We could rely more on oil. We could cut subsidies, for instance the fuel subsidy.
Q: Would that not cause social unrest?
A: We don't know that. It is a popular myth that we cannot do without fuel subsidy. If we pay attention more closely to the question, who are the real consumers of fuel? The answer is, those in the middle and upper middle class.
According to official data, among those in the lower socio- economic groups, 66 percent use firewood as a fuel source, not kerosene. It is the urban dwellers who buy kerosene. They are mostly middle and upper middle class.
However, because they are vocal, they may come across as representing the whole of the population.
Now to return to reducing the budget shortfall, if we couldn't reduce the fuel subsidy, we would need the loan.
However in the long term, the prospects tend to be gloomy, because here we have to look at the fiscal sustainability, whether we will be able to overcome our massive debt problem, whether we should restructure our debt again, and all that. So to answer your question, it is both good news and bad news.
Q: How will regional autonomy affect the nation's fiscal situation?
A: The problem is more administrative than fiscal. New laws can be introduced to address ways of sharing revenues. We have to be wary of the likelihood of shifting corruption from the central to the regional governments, because the regional governments will suddenly have so much power.
Then there is a likelihood of trade barriers in various regions, where one product might be free of tariff in one region but not in another. Problems like this might be more serious.
I am not saying that regional autonomy should not go on. But the process has to be done with care and extreme consideration. If that is not done, foreign investors will have untold problems dealing with each region, and they usually don't like uncertainties.
Q: So you think the next two years will be crucial in addressing the broader future?
A: Yes, we will need to finish the debt restructuring and the required bank recapitalization during that time. If we achieve that, we can be more optimistic. We already have good infrastructure. We have banks, we have built roads, we are relatively better off than say, in 1966.