By Darren Mcdermott and Jay Solomon
Indonesia's failure to present a plan for repaying a crushing load of corporate debt is helping sink the rupiah to new depths.
The currency slumped to a record low of 11,900 rupiah to the dollar Wednesday before strengthening slightly in late Asian trading to around 11,575 rupiah, down 15% from Tuesday. Battered by growing reports that international hedge-fund managers are considering taking bets against the Indonesian currency after sitting out in recent weeks, the rupiah dragged neighboring Southeast Asian currencies down with it.
Viewing news coverage of South Korean financial officials visiting the New York headquarters of Korea's creditors, international bankers are turning from flabbergasted to infuriated at their lack of access to the decision-making process in Jakarta. Talk of a government-imposed debt moratorium is quiet for now but could resurface, executives fear.
"The biggest problem is the private debt and there is no one in Indonesia standing up and doing anything about it," says the chief executive for Asia at a major European bank. "There is no one in the government who is in a position to work this out."
Recent Recruits
In fact, President Suharto has recruited several individuals, including a former government official and a private businessman, to take charge of working out a solution to the debt crisis.
But a meeting two weeks ago in Singapore between creditors and two Indonesian representatives – former longtime minister Radius Prawiro and Salim Group President Anthony Salim – failed to sketch out even the framework under which talks would progress. Since then, there has been little contact, say bankers involved with the negotiations.
Senior government officials said Wednesday they are working on the problem, but they acknowledged that it's a thorny one.
At a news conference, Finance Minister Mar'ie Muhammad said Korea's debt problem is "more manageable" and simpler administratively. Widjojo Nitisastro, Mr. Suharto's top economic adviser, said the government is working on the "important challenge" posed by foreign debt. "We are aware of this problem and working on it," Dr. Widjojo said, adding that the government has to be "very careful, very systematic, but we will come to effective answers."
A bailout of the private sector, however, which is being advised by business interests in Jakarta, isn't an option, Mr. Mar'ie added.
Some observers find it difficult to muster much pity for bankers who, in search of high yields not available elsewhere, pumped more money into Indonesia than companies there could spend productively. But for now, as long as bankers refuse to extend the maturities on $65 billion in debt estimated to be due this year, the rupiah will continue to fall.
Lack of 'Clarity'
"The market doesn't like the fact that there are thousands of borrowers and no clarity about the resolution of their debts," says Don Hanna, an economist at Goldman Sachs (Asia) LLC in Hong Kong.
The details of what has been known generally for weeks – that hundreds of Indonesian firms can't meet payments on their foreign-currency debt – now are starting to emerge as more companies run out of cash. One of the latest is paper maker PT Surabaya Agung Industri Pulp & Kertas, which has entered a "standstill" agreement with creditors pending a debt restructuring, according to Sindu, a director at the company. Surabaya Agung, which mounted an aggressive expansion campaign in a vain attempt to catch up with Indonesia's pulp and paper giants, owes more than $250 million to banks including Sumitomo Bank, Bank of Tokyo-Mitsubishi and HSBC Investment Bank, according to people familiar with the arrangements.
While other such firms have simply stopped paying debts for now, they know someday they will have to resume. Each time the rupiah strengthens to 8,000 rupiah or 9,000 rupiah per dollar, there's "massive demand" for dollars from such companies, pushing the rupiah back down, explains Neil Saker, economist at SocGen Crosby in Singapore. "Until the corporate sector's future is assured, everything else is secondary" in addressing Indonesia's economic problems, Mr. Saker says.
Unclear Path
Just how that will happen is no clearer now than before the parade of officials from the U.S. and the International Monetary Fund marched through Jakarta last week. The revised agreement that Mr. Suharto and IMF Managing Director Michel Camdessus signed has won scattered applause, and has cheered the stock market, where the composite index rose 4%, or 17.96 points, to 466 on Wednesday. But "the currency market is telling you nothing is happening," to clear away the debt burden, says Rajeev Malik, senior economist at Jardine Fleming International Securities in Singapore. One possible solution already presented to the Indonesian government comes from Dutch giant ABN Amro Bank NV, which suggests that the government set up a "debt clearing" service, according to a Jakarta-based executive at the bank. The plan would install a neutral party, perhaps an accounting firm, to manage negotiations and handle payments between some 100 international lenders and thousands of borrowers.
Other bankers and economists suggest a Latin America-style Brady Bond program, in which the government would take the private-sector debt onto its books and reschedule it at longer maturities with lenders, issuing bonds in the process to finance the transaction. But who would agree to guarantee such bonds remains unclear. The U.S. guarantee carried by the Latin American Brady Bonds was key to their success.
Lack of Government Action
And such efforts would require concerted government action of a sort that some bankers feel is currently beyond the capacity of the Suharto government. The government, never open about much of its business in the best of times, is just six weeks away from the presidential selection. While Mr. Suharto's re-election to a seventh five-year term is all but assured, many observers believe that several key officials – including the central-bank governor and finance minister – won't be returning to office.
In addition, Mr. Suharto's advancing years – he's 76 – raise serious questions about who will run Indonesia after him. Concern has been exacerbated this week by speculation that controversial Research and Technology Minister B.J. Habibie is Mr. Suharto's choice for vice president. Such political worries, say some bankers and economists, is as much a barrier to the rupiah's recovery as anything else.
Bankers who met with U.S. Deputy Treasury Secretary Lawrence Summers in Singapore told him that the rupiah had almost no chance of appreciating back to 5,000 to the dollar, no matter how market-friendly the terms of the IMF package then still being negotiated, according to executives who attended the meeting.
[Richard Borsuk and Raphael Pura in Jakarta and Erik Guyot in Hong Kong contributed to this article.]