Kate Linebaugh – Indonesia's bank rescue agency (Ibra) inched nearer to recouping the cost of propping up the nation's lenders this week when it replaced management at the country's biggest car-maker, clearing the way for the agency to sell its 43 percent stake.
Once that sale – expected to raise about US$500 million – is completed, though, the two-year-old agency still has to find buyers for Bank Central Asia, Bank Danamon, Bank Bali, Bank Niaga and hundreds of lesser-known assets. And the job is only going to get tougher, analysts say.
Even if it gets top dollar for everything it controls, Ibra faces a quandary: a US$25 billion gap between the value of the assets and the recovery cost. That is a lot of money in a country where annual wages average less than US$1,000. "Where does the difference go?" said Ibra chairman Cacuk Sudarijanto. "That debt will never get paid."
Ibra was formed at the peak of Indonesia's financial crisis as the rupiah lost as much as four-fifths of its value and interest rates passed 70 percent. As the economy shrank 14 percent in 1998, Ibra took control of the assets of interconnected companies and banks in return for propping up failing lenders. If the nation's nascent economic recovery is to succeed, it must now restructure the banking industry.
So far, the bank rescue agency is on target to meet its asset-recovery target by 31 March, Mr Cacuk said. With the planned sale of Astra – Lazard Asia Fund; Bhakti Investama, a publicly traded securities company linked to George Soros' Quantum Fund; a consortium of US investors led by Gilbert Global Equity and Newbridge Capital; and the Government of Singapore Investment Corp have expressed interest – Ibra is selling its crown jewel.
The car-maker booked a profit of US$108 million last year, after two years of losses. The same cannot be said of the country's banks. Bad loans reached more than 80 percent of all loans at the height of the financial crisis and, with few exceptions, the lenders are still losing money.
Analysts say that will make it tough for Ibra, which has said it plans to raise US$400 million from selling Bank Central Asia, and also has an eight percent stake in First Pacific Co of Hong Kong. Meanwhile, Bank Mandiri, the country's largest bank, also hopes to raise US$1.5 billion through an initial share sale in August to repay the government for bailout funds.
Privatisations will help fund part of the recovery cost. For the new budget year to 31 December, the government wants to raise 5.9 trillion rupiah (HK$6.49 billion) this year selling state companies such as domestic call monopoly operator Telekomunikasi Indonesia and dominant international call operator Indosat.
Still, analysts believe the government will face a shortfall in the medium term when bonds the government issued to help recapitalise the banking industry begin maturing. And if it does not have enough cash to pay, many fear the government may simply print money to fill the gap.
"The question is how much money do they need to print in the end," said Qaisar Hasan, head of research at Jardine Fleming in Jakarta. In late 1997, Indonesia printed money to prop up its banking system, but most of that was then taken out of the country by the delinquent bank owners – contributing to a surge in inflation to more than 80 percent in 1998.
Coupon payments on the government bonds are expected to cost 178 trillion rupiah – almost the entire planned expenditure in this year's nine-month budget – between now and 2004, on top of the 643 trillion rupiah cost of fixing the banks.
The government sold 282 trillion rupiah in bonds with maturities of up to ten years paying quarterly interest. More bonds will be sold this year for Bank Negara Indonesia, Bank Niaga, and two other state banks. That will bring the government's debt to 95 percent of its gross domestic product by the middle of the year.
Still, the newly independent central bank – along with the International Monetary Fund – are unlikely to agree to increasing the money supply.
The bonds could be refinanced on the country's fledgling domestic bond market, said Miranda Goeltom, Bank Indonesia deputy governor. That will work as long as it does not interfere with the government's target of reducing its debt to 60 percent of GDP by 2010. Whatever the long-term cost, Indonesia must begin selling assets to start paying for it immediately, said Kian Guntur at Nomura Securities in Jakarta. "If they can get Astra out of the system, hopefully it will trigger more interest," he said.