Will 'Jakarta Initiative' succeed in its daunting purpose?

By Eddy Soeparno

JAKARTA (JP): The Indonesian government recently announced The Jakarta Initiative, by forming a Task Force to coordinate the restructuring process of Indonesia's mounting private sector debt, estimated to be around US$65 billion.

The principles laid out for the restructuring exercise (which to date are believed to be non binding), will be used as a guideline for all corporate workouts involving foreign creditors.

Key points of the framework include: the appointment of a credible financial advisor by each troubled debtor; debt restructuring will require business reorganization -- not just new loan repayment terms; a promise by debtors to provide accurate and timely financial information; a pledge by creditors that if such information is forthcoming they will agree to a "standstill" and not charge default interest and other penalties; and that creditors will be treated equally with equity holders suffering the first losses.

To add credibility to the whole initiative, the task force will work closely with a so called Corporate Restructuring Advisory Committee, consisting of high caliber foreign and domestic financial institutions, the Indonesian Bank Restructuring Agency (IBRA) and the Indonesian Debt Restructuring Agency (INDRA). The Committee, will further function as a de facto "think tank" for the Task Force, by providing necessary recommendations on various debt and corporate workout problems.

Although the plan does not by itself initiate any debt restructuring talks, it is expected to further set out a standard of practice and can be referred to as a starting point for more progressive and positive negotiations.

However, the question remains: Why only now?

It is no secret that the government was widely criticized for not addressing the private sector debt issue swiftly and more importantly, accurately; since debt restructuring talks had already begun as early as November 1997 and remain unresolved to date.

In addition, discussions between international creditors and the government led Private Sector Debt Restructuring Team have proven to be less effective in overcoming the problem. And finally the much anticipated flop of INDRA, should have given the authorities a clear indication, if not proven, that government led efforts needed a more cohesive and consistent approach, in order to achieve any meaningful results.

The result is evident today: Indonesia's foreign exchange obligations are still at record high levels; industries have halted, as much of the needed offshore liquidity is kept tightly in creditor's pockets, while the health of the banking sector is deteriorating by the day due to the rising amount of bad loans.

Does it actually require a contracting economy to prove that a more concentrated effort is required to address the private sector debt issue? Recent developments show that creditors are impatient about the lack of negotiation progress and stepped up pressure by opening the window of liquidation, especially since the national bankruptcy court opened its doors for business last August.

This development seemed to have caught the attention of the authorities, since more bankruptcies effectively result in higher unemployment, lower tax revenues (for the Government) as well as potential bankruptcies of supporting industries.

As such, in order for the Jakarta Initiative to serve its primary purpose, the government, through the recently established Task Force should first and foremost identify the immediate problems lenders and borrowers face in their debt talks.

It should come as no surprise that in most creditor's view, the principles laid out in the Jakarta Initiative consist of "yesterday's news", as these efforts have been actively applied in negotiations over the past 10 months with minimal results.

Therefore, it is in the Task Force's best interest to analyze how workouts are actually being "worked out" rather than implementing other "half cooked" efforts which have proven ineffective in the past.

For instance, creditors are nowadays not shy in accepting "haircut" settlements, in which a debtor makes good its obligations to his creditor at a (normally steep) discount.

In a way, haircut settlements are preferred by certain parties, as time, energy and other resources can quickly be allocated to handle other, more productive businesses.

In addition, many creditors have primarily charged off a bulk of the problem assets from their books; thus any haircut settlement would be rightfully booked as another form of income.

Other settlement practices such as debt to equity swap, are also becoming increasingly popular, although some creditors still firmly believe that "banks are in the business of managing risk and not assets".

Furthermore, it is equally important to ensure that debtors are aware of the principles and ethics of debt restructuring, as many debtors (mostly out of inexperience), have acted in a manner that is totally unacceptable to creditors.

Often company owners and directors have refused or stalled a restructuring process in anticipation of an immediate rebound in the rupiah.

Others have agreed to restructure, but have prevented auditors, lawyers and valuers from conducting proper and necessary investigations.

In addition, more than a handful of debtors have acted as if it were "business as usual" with the company, by continuing to sidestream funds, shifting assets from one subsidiary to the other, without realizing that the minute a debtor is declared in default, creditors maintain the right to have a say on how business should be run.

Finally, ingredients to a successful debt restructuring would include honest and open information flow between the two parties.

As such, the issue of disclosure, previously a "taboo" subject to most business families should be revisited and reemphasized.

The Task Force should realize that in most cases it is lack of disclosure that slows down discussions between banks and sometimes even jeopardizes progress made in earlier talks.

If the Task Force can manage to precisely identify the above issues and address them accordingly and wisely, only then can the Jakarta Initiative produce quick and meaningful results.

Most bankers and economists say an economic recovery in Indonesia cannot be engineered unless the mounting foreign debt problem is dealt with.

Unfortunately clear evidence has shown that past efforts at debt restructuring have floundered as creditors mostly squabbled with borrowers over how to conduct negotiations.

While continuing to sit on negotiating tables, creditors have recently shown impatience with the lack of progress and started showing signs of leaving the matter to the (bankruptcy) courts.

Progress on corporate debt restructuring will be a key focus over the months to come and the Task Force will be in the public's scrutiny, as this is seen as a final attempt by the government to facilitate the negotiations, before directly intervening in the workouts.

It is highly probable that the Indonesian government, out of desperation and impatience, will call for direct intervention, if the guidelines announced in the Jakarta Initiative do not foster quick solutions.

The IMF seems likely to support such actions, as in the case of Thailand. The Kingdom's most recent letter of intent with the International Monetary Fund says that, if necessary, the government will develop procedures "for enforcing a timetable for implementing agreed guidelines, including arbitration among deadlocked parties".

In most cases you could say that "extreme problems call for extreme solutions". Looking at the state of the nation's economy today, it is time for extreme solutions.

The writer is a corporate finance director of American Express Bank.

Window: It should come as no surprise that in most creditor's view, the principles laid out in the Jakarta Initiative consist of "yesterday's news", as these efforts have been actively applied in negotiations over the past 10 months with minimal results.