Will 'Jakarta Initiative' succeed in its daunting purpose?
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.