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Skip Navigation LinksHome :: Back Issues :: It’s time to smile and ask once again

March 2002

It’s time to smile and ask once again


INDONESIA




       
Megawati
Sukarnoputri
It's that time again when Indonesia will try to be its most amiable and ask for leniency from its creditors. And with president Megawati Sukarnoputri leading the charm offensive, it seems the country might be more successful in gaining concessions than under her disagreeable predecessor, Abdurrahman Wahid.
In the first week of April, Indonesia will be putting its case to the Paris Club in the hope that it can reschedule $3 billion in principal and interest payments from March 31 2002 until December 2003. To many, including rating agency Standard&Poor's, it will in effect be a selective default and could threaten its CCC rating further. "But it needs it," says a banker in Hong Kong, "because the multilaterals are not going to pony up any more money."
Another banker strongly disagrees: "It's a stupid and desperate request. Looking to reschedule the principal is fine but they don't need to reschedule the interest. And pushing back the rating will definitely not help." Some believe it is just a question of, if you don't ask you don't get. And Indonesia is asking for as much as it dares.
As is to be expected, several issues involving the country's privatization programme and local corporate debtors keep grumbling along in the background and threaten the whole process. The noises coming out of the Paris Club for now though are reasonably positive. But time is running out for Indonesia to resolve its problems if the government is going to receive the thumbs up.
The country's official debt runs at $140 billion, with total external debt to GDP standing at 98%. Over $30 billion is owed to the IMF, World Bank and the ADB - 58% of its external debts. It owes a further 39% of all its debt to the Paris Club. And with debt service repayments expected to peak in 2002, Indonesia needs any help it can get. However as one banker points out, if the Paris Club fails to come through, Indonesia won't be able to pay anyway.
It would seem to follow then that making antagonistic speeches that the Paris Club may get wind of is probably not a wise plan. But when it comes to Indonesian politics and the dreaded vested interests, sense often flies straight out the window.
So perhaps it shouldn't have come as too much as a surprise when Amien Rais, chairman of the People's Consultative Assembly in Jakarta, decided to declare that the selling of state-owned assets to foreigners was unpatriotic and turning the country into a nation of coolies. His xenophobic diatribe can best be described as unhelpful, especially when bringing in foreign investors is a must.
If Indonesia is going to get any sympathetic debt relief in the future it has to get its forecast Rp42 trillion ($4.1 billion) budget deficit, 2.5% of GDP, under control. To help fill the gap, a target of Rp3.9 trillion has been set for the privatization programme. And this will mean selling assets to foreigners.
One analyst is scathing of this new-found patriotism. "In parliament, they aren't the most market-educated bunch. They just want to protect themselves and their ownership," he says.
Rais's comments also come at a time when the Bank of Central Asia is on the market yet again. And it's the UK's Standard Chartered and US investment firm Farallon Capital that appear to have the edge in snapping it up. It's to be hoped it's third time lucky for the government and the Indonesian Bank Restructuring Agency (IBRA).
The process has tripped up before now because of accusations of corruption and flawed processes. A successful sale will show that Indonesia is keeping to promises that it signed in a letter of intent with the IMF. "The sale of BCA is the litmus test for whether the government is serious about reform," says Johanna Chua, Salomon Smith Barney's vice-president, sovereign credit research.
But the sale has hit problems yet again. It was expected that the winner would be announced in the last week of February but IBRA declared that it would need another two weeks for it to make up its mind, offering no explanation why. On top of this, Farallon is threatening to withdraw from the contest, crying foul.
It believes that other participants were allowed to change their bids, including Standard Chartered and its expected offer of $580 million. One banker explains his take on the situation: "IBRA approached all the bidders to see if they wanted to make a bid change, nobody did except StanChart. So allegations of insider knowledge were then bandied around."
It's a serious situation. In short if the sale doesn't go through, creditors and investors will view it very negatively. According to one observer in Jakarta, if the deal falls over again, the meeting with the Paris Club will be taken up with questions regarding BCA rather than the issue of rescheduling debt repayments. "The discussion will just revert to past conversations about why they can't do anything that is politically difficult. For the Paris Club to give Indonesia some breathing space it has got to start taking on the challenges," he says.
A further headache for Megawati and her cabinet is the issue of Indonesia's 21 largest debtors, which themselves are asking for more time. During the Asia crisis the Indonesian government was forced to bail out the banks. It was done under the premise that assets would be surrendered to the government for future sale.
But that was four years ago. And there has been very little handed over. "These guys who took the loans have in effect committed daylight bank robbery," says an American banker in Indonesia. In the last week of February, IBRA stepped forward and curiously proposed extending the debt repayment schedules from four to 10 years and lowering the interest rate on the debt to 9%. There was uproar in Megawati's cabinet and clear divisions have developed.
Members have very publicly been throwing toys out of their prams and threatening to resign if the plan is implemented. And rightly so - these debtors can pay but instead choose to drain government resources because they can. "It's a terrible proposal. There is no reason why they shouldn't pay," says a senior banker. Another adds: "It will affect some of the creditors to the government. If the government is rescheduling debts that are owed to them then the creditors to the government are not going to get paid."
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