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Debt body not enough for Indonesian firms

South China Morning Post - August 5, 1998

Indonesia's crippled companies can draw little comfort from this week's launch of an agency to help restructure their crushing foreign debts, analysts say – they need hefty debt write-offs, not just rescheduling, to save them.

The Indonesian Debt Restructuring Agency (Indra), born out of a deal struck in Frankfurt in June with overseas creditors to restructure the country's US$84 billion in private-sector foreign debt, officially started operating on Monday. But no companies have yet signed up for the voluntary scheme, and analysts believe Indra is a mere sideshow to the main issue – negotiations between individual firms and creditors on comprehensive debt forgiveness.

It may be the outcome of these lengthy and difficult talks, rather than the success of Indra, that governs the survival of debt-ridden firms. "Companies simply cannot pay, even under the terms agreed in Frankfurt. Creditors must realise they have no option but to write off a lot of their loans, try to come to an agreement with companies that can be salvaged, and get back what they can," said a senior analyst at a foreign investment bank in Jakarta.

The foreign debt of Indonesian companies has rocketed since July last year due to the more than 80 per cent fall in the value of the rupiah against the US dollar. A solution to the private-debt crisis is of critical importance for the country's eventual economic recovery. In its latest report on Indonesia, the World Bank said: "Central to a resolution of this crisis will be a mechanism to reduce this debt burden and restore Indonesia's corporate capital stock to productive use."

Under the Frankfurt deal, firms registering with Indra can reschedule their foreign debt over eight years with a three-year grace period when only interest needs to be paid. Indra also takes the burden of foreign-exchange risk.

The agency said on Monday that the base exchange rate for debt conversion would be 13,233 rupiah (about HK$7.62) to the dollar. But firms joining the scheme in the registration period to June 30, next year can choose the most favourable exchange rate from the previous 20 days, if this is more advantageous than the base exchange rate. This means indebted companies can benefit from a strengthening rupiah, but will be protected if the currency falls.

Analysts believe the selected base exchange rate offers little incentive for companies to join Indra, as they can get an equally favourable rate from the market. Only if the rupiah declines will it become tempting to join.

But details of the Indra scheme are irrelevant to many firms because most cannot afford to pay interest on their debt, analysts believe. "Indra doesn't offer an awful lot to debtors. All it is offering is a fixed exchange rate and a not particularly meaningful interest rate," said Tom Inglis, head of research at ING Baring Securities in Jakarta.

The central bank has said it hopes for a participation rate of 60 per cent in Indra, but analysts are doubtful. "The Indonesian firms in dire financial straits, businesses aimed at domestic consumers for example, are in such trouble that repayment at the moment is hardly an option," Mr Inglis said, adding that bigger firms that can afford to pay under existing terms would not go into Indra.

He said Indra's main value was as a "starting framework" for talks between creditors and debtors. A bankruptcy law due to be introduced this month would also help get talks going, as it would force recalcitrant debtors to negotiate, he said. Analysts believe international creditors are increasingly coming to realise that write-offs will be needed.

The International Monetary Fund's latest deal with Indonesia, agreed in June, contained an explicit recognition that write-offs would have to be part of an overall debt settlement.

Analysts also question another benefit claimed for Indra – that by putting off the repayment of the $34 billion of private, foreign debt maturing this year, the agency will reduce dollar demand and boost the beleaguered rupiah. "Have the dynamics changed? No," Mr Inglis said. "It's not as if firms were paying their debts yesterday and will stop paying them now as they join Indra. They were not paying in the first place."

[On August 6 Dow Jones Newswires said that an IMF legal consultant, Jeff Hoff, has expressed doubts over the effectiveness of the Indra plan. He cited the lack of grace period for interest payment as one hurdle saying that even with the three-year grace period on the principal, because it does not included the interest portion, at current exchange rates most corporations aren't even able to service interest payments - James Balowski.]