Desperate times demand desperate measures. But the decision by politically embattled Indonesian president Abdurrahman Wahid to shore up support by allowing indebted conglomerates to get off the hook could easily backfire.
At issue is a planned “restructuring” of $3.7 billion of debts owed to the Indonesian Bank Restructuring Agency (IBRA), a government body established to clean up the mess left in the wake of the 1997 Asian Financial crisis.
The debts are owed by four top local business groups, including textile maker Texmaco and chemical group Tirtamas and were incurred following the collapse of the rupiah in early 1998. Included among them is a portion of the Rp138 trillion (about $34 billion at the time) that was supplied to ailing banks as liquidity credits during a bank run and was subsequently found to have been improperly used.
IBRA has been battling to retrieve the funds since 1998, when it signed agreements with a number of the companies under which they pledged assets to repay the money owed. Now, not only have many of the assets been run down in value but auditors have found they were seriously overvalued in the first place.
IBRA’s efforts to retrieve the funds have been stymied by the corporates’ delaying tactics, along with a highly unreliable bankruptcy court, internal politics within IBRA itself, and a recent surge of nationalism, most notably in the Indonesian parliament. Nationalists recently banned IBRA from selling stakes even in two banks where it holds clear ownership, on the basis that low market prices would guarantee a Fire sale to foreigners.
“Wahid needs to make a deal with the cronies,” says Martin Panggabean, chief economist of Bank Mandiri, a large state bank. “Their offshore funds could kick start the economy if they can be persuaded to bring them back in. He really has few other options.”
After a year in power, Wahid’s popularity has recently sunk to new lows. He has been unable to deliver on a raft of reform promises. Ex-leader Suharto remains unpunished. His son Tommy, found guilty of corruption, has not yet been jailed. Repeated efforts to resolve separatist and religion related “small wars” in the provinces have been only intermittently successful.
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Wahid narrowly avoided a head-on impeachment confrontation with parliament in August and is now indirectly embroiled in two corruption scandals for which he has denied responsibility. He has established civilian control of the military but at the expense of demoralisation and dissent within the ranks, which spills over into an increase in crime and a lack of impartiality in the warring regions.
The president badly needs to develop more public support, and boosting the economy is an obvious route. His new economic team, led by Rizal Ramli, a Harvard-educated economist who was a strong government critic during the Suharto years, has already obtained $4.8 billion in donor Financing which will fund the budget deficit for this year, albeit at the expense of further increasing Indonesia’s foreign debt, now at more than 90% of GDP.
But with most new foreign investors scared off by the reports of violence (those located in Singapore being an exception) and existing investors embroiled in problems thrown up by the political transition, the billions still parked offshore by the Indonesian conglomerates look like an excellent way to provide at least a short-term fillip.
But the plan to forgive the past in the interests of the future, so as to persuade the owners to bring the funds back, not only throws up its own contradictions but also may not produce the intended effect. Some observers believe it may not even be necessary.
Without benefit of help from the bombed-out conglomerates or the local banking system, the Indonesian economy is already performing quite nicely. Growth is predicted at a minimum of 4% for this year, with optimists expecting 6%. Exports are booming, not just because of a high oil price. Manufactured exports are up 25%. Domestic consumption is booming, with car and motorcycles sales almost back to pre-crisis levels, and retailers reporting strong sales, expansion plans and decent profits.
“We are continually surprised by the strength of the economy,” says Michael Chambers, head of institutional sales at HSBC Securities. “The macro numbers look very good. Exports, not just oil, are very strong and cement and car sales are rising rapidly. It’s not just a consumer boom.”
What’s more, the structure of the economy has changed substantially since the crisis. The devalued rupiah has delivered growth to the regions outside Java, which export commodities and grow agricultural crops priced in dollars, while on the main island, numerous small and medium-size equity Financed businesses have sprung up.
Initially aimed at generating export earnings, they have now made sufficient profits to diversify into domestic areas. Investment was up by 24% this year. Not all of Indonesia’s companies were severely hit by the Financial crisis. Listed companies in defensive or export-oriented sectors such as cigarettes, food, pulp and paper, mining and oil, telecoms and even retail not only survived but often benefited from the crisis.
They are now being joined by other large companies in more sensitive areas such as cars and cement and by others that have renegotiated their debt or sold off equity stakes to foreigners and achieved access to new foreign funding from their banks. A large state sector, relatively debt-free, is also doing well.
Former economics minister Kwik Kian Gie believes this mixture of small and medium-size companies and the surviving corporate sector could provide the foundation for a new and sustainable economy, without any need to revive old indebted conglomerates with a reputation for corruption and cronyism.
So will the debt forgiveness plan work? It has already sparked Fierce criticism. The IMF has called for an independent appraisal of the terms, which would stretch payments out over as long as 10 years. Critics, describing the deals as a crony bailout, aimed at raising election funds, have called on Wahid to resign.
Two weeks after it was announced, observers were pointing out that the government had authorised the Texmaco group to borrow more money from a state bank. That could produce exactly the same moral hazard that precipitated the crisis in the first place. Meanwhile, the rupiah continued its downward drift. The owners of the billions parked offshore also did not seem to be convinced.
