Mia Trinephi, Hong Kong – While Indonesia's debt has reached unsustainable levels, the government's immediate options to restructure its debt remain limited, analysts say.

The new cabinet formed by President Abdurrahman Wahid will have to reassure markets and prove its determination to go forward with financial and economic reforms before Indonesia may tap the debt market again.

Indonesia needs private capital inflows, but foreign investors will stay out until the government succeeds in regaining confidence through its economic reform program and political stability.

Some analysts welcomed the reshuffle but noted that the new cabinet members are unknown to the public. Despite an initial hostility that sent the rupiah to the ground when Wahid announced his new cabinet, analysts say that the new Indonesian rulers should be given a chance.

"Certainly, the old cabinet was largely ineffective" and the challenge before "the new cabinet is to change this situation," says William Belchere, head of economics and fixed income research at Merrill Lynch Asia Pacific. "However, the market reaction suggests that investors are not yet convinced whether or not the new grouping will make much of a difference," adds Belchere.

"Patience is a must" when dealing with Indonesia, advises David Fernandez, head of Emerging Asian economic research at J.P. Morgan.

But Indonesia doesn't have the luxury of time, considering that its external debt currently represents 90% of the country's gross domestic product and observers say that the ratio is increasing, meaning that debt is growing faster than the economy.

"The level of Indonesia's debt is not sustainable," says Dominique Dwor-Frecaut, fixed income research analyst at Barclays Capital Asia Ltd.

What are the options? That's what the government, its advisers and international institutions are trying to work out, but right now they're stuck. J.P. Morgan, for instance, has been advising the Indonesian government for years and "continue to work on various debt management solutions," Fernandez says.

Indonesia was back on the international debt markets talk this week with a potential Brady bond-style plan. The rumors were quickly denied by the World Bank, which supposedly supported such a bond. "The ideas are quite preliminary," says J.P. Morgan's Fernandez. "Indonesia is not in the position to do anything close to a Brady exchange when one looks at the structure of its debt," he explains.

When Latin America defaulted, the US offered to issue Brady bonds which consisted of a debt exchange collateralized with the purchase of zero-coupon bonds financed through additional funding from the International Monetary Fund, explains Dwor-Frecaut. Brady bonds are also backed by US Treasurys. One problem with an Indonesian Brady is that a large part of the external debt that still needs to be restructured is private debt.

The government's total debt, domestic and foreign, already amounts to $134 billion, of which $65 billion are domestic bonds issued last year to recapitalize Indonesia's banking sector.

After the government managed to reschedule $5.8 billion of debt with the Paris Club of creditor countries in April and is still waiting for the London Club of creditor banks to accept the rescheduling of $850 million in foreign commercial loans, it seems unlikely that it would be willing to take on the additional burden of private debt.

Another solution is to tap the Japanese market with a Samurai bond. Considering Indonesia's current selective default rating from US credit ratings agency Standard & Poor's Corp., analysts say that any non-guaranteed issuance on the US market is impossible, unless Indonesia pays the price.

"The Samurai market seems to be more friendly and a Samurai bond is definitely an option," says Warren Mar, head of Asian fixed income research at BNP Paribas. However, a Samurai "might still be difficult until the political environment shows sustained improvement," unless Japan guarantees the Samurai, says Belchere at Merrill Lynch.

But before any Indonesian international debt issuance materializes, the government has to work out its domestic bankruptcy laws, dispose of nonperforming loans taken over by the Indonesian Bank Restructuring Agency, go on with its privatization program and corporate restructuring.

IBRA, which has to dispose of 600 trillion rupiah of nonperforming loans it took over from ailing banks, is also looking for innovative ideas. To achieve those goals, Indonesia needs foreign investment. And we're back in the vicious circle.