Jakarta – Saving Garuda Indonesia through funding from Daya Anagata Nusantara Investment Management Agency, or Danantara, to the tune of Rp20 trillion carries with it major risks for the future. The government is gambling on retaining a state-owned airline that has really long been bankrupt for the sake of prestige.

The government is planning once again to assist Garuda, which has received repeated injections of capital but has never been able to rid itself of its chronic corporate ills. Previously, the government used injections of state capital, but now President Prabowo Subianto assigns Danantara.

Initially, the government planned to save Garuda through a number of schemes. One of these was using an overseas shell company that would be Garuda's parent company. This plan was then abandoned and replaced by an injection of credit from a state-owned bank with commercial interest rates. Danantara, as the manager of the assets of all state-owned enterprises (SOEs), would be the guarantor for Garuda's loan. But then, the scenario changed again. Danantara directly injects capital through mandatory convertible bond schemes or equity convertible shareholder loans.

Although this huge loan will come from Danantara, as the SOEs parent company, it will still increase the burden on Garuda. At present, Garuda is still saddled with debts and interest payments to a number of creditors. The corporation also recorded a net loss of US$75.93 million, or around Rp1.25 trillion, in the first quarter of this year. Meanwhile, its debt-to-equity ratio is minus 2.93, which means that most of Garuda's financing is from debt.

With Garuda on its last legs, additional debt will only add to the long list of potential company ills. For example, if there is economic uncertainty, a weakening of the rupiah, or increases in the price of aviation fuel, operating costs will increase, and losses will soar. If the company continues to make losses, the capital injection from Danantara will have been for nothing.

And risks will increase if the funds injected by Danantara are used to buy aircraft, but do not lead to a rise in Garuda's income. Without careful calculations, the addition of aircraft will only drive up operating costs that are not matched by revenues. This could be a concern because this effort is being undertaken at a time of weakening consumer buying power, which will lead to low load factors. At present, Garuda's load factor is only 78.8 percent, below the industry average of around 80 to 86 percent.

If Garuda's financial position worsens, Danantara will also suffer. The funds collected by Danantara from SOE dividends and other sources could disappear. Even more dangerous is the moral hazard, given that capital injections from Danantara no longer need the approval of the legislature. This means that the checks and balances mechanism in the use of SOE funds, which are also public funds, no longer exists.

All these efforts to save Garuda are like trying to square a circle. Pointless measures that contain high risks should not be carried out, especially if the aim is simply to satisfy Prabowo's narrow nationalistic desire for Indonesia to continue to have a state-owned airline. This nationalism consideration is mistaken at a time when many rich nations have privatized their airlines because owning them no longer made sense.

– Read the Complete Story in Tempo English Magazine

Source: https://en.tempo.co/read/2019579/the-squared-circle-of-saving-garud