ECONOMICS: Bad loans in Indonesia
Far Eastern Economic Review
April 16, 1998
Now, the Hard Part:
Indonesia must grapple with bad loans and bank revamp
* By Salil Tripathi
The wait is finally over for Bank Danamon. The much-hoped-for cash
injection never materialized from the Salim Group and Credit Suisse
First Boston, which on April 6 backed out of a plan to invest in
Danamon, Indonesia's third-largest private bank. Three days earlier, the
Indonesian Banks Restructuring Agency had taken over the management of
the troubled Danamon, which has come to embody the problems riddling
Indonesian banks: too many bad loans, too many in foreign currency. IBRA
in early April also froze or took over the management of 14 other banks,
including one owned by Mohamad "Bob" Hasan, industry and trade minister
and President Suharto's golfing buddy.
So subdued is the atmosphere in Indonesia, however, that IBRA's
action drew hardly a protest from Suharto cronies, quite unlike the
furore that erupted over bank closures in mid-November. That's little
consolation for hundreds of foreign investors and creditors, who have
been waiting since October for Indonesia to grapple effectively with its
economic ills. Indeed, Jakarta needs to work much harder to get itself
back into any sort of shape. Besides restructuring banks, it needs to
tackle the distressing issue of mounting corporate debt, currently at
$74 billion, and to stem the dangerous growth in monetary supply in
These elements are addressed, among others, in the latest reform
programme hammered out by the International Monetary Fund for a $33
billion bailout package for Indonesia. Under the new deal, the IMF loan
will be disbursed in smaller portions, but at shorter intervals. The IMF
had earlier suspended a $3 billion tranche because of Jakarta's tardy
implementation of a previous deal. As the markets waited for an end to
the impasse, commerce ground to a standstill, and so did Indonesia's
economic recovery. The country's troubles aren't over yet. IMF money
still won't flow into Indonesia until Jakarta seriously begins carrying
out the fresh recommendations. And the markets won't respond until
they're convinced that Suharto won't find new Javanese excuses to avoid
the more painful reforms.
But a vigorous revamp of the banking system should inject confidence
in the market. An economist with a European brokerage in Singapore
believes another 150 banks at least must be closed. Indeed, of
Indonesia's 212 local and joint-venture banks, only five are considered
liquid today. And only 10 meet IBRA's new recapitalization requirement
of 1 trillion rupiah ($120 million) by end-1998. Of those 10, two are
now under IBRA's management. According to a confidential list traced to
Bank Indonesia and obtained by the REVIEW, the central bank has
identified 38 problem banks, including some of the 14 recently targeted.
But that's still too few, given that more than 100 other banks are
hamstrung by mountains of bad loans.
One way forward would be consolidation, permitting a few, strong
banks to emerge. But bank managements would have to move fast -- the
weak rupiah is exerting tremendous pressure on banks' capital-adequacy
ratios, says Jos Parengkuan, managing director of Lippo Securities in
Jakarta. The rupiah's value is entwined with Indonesia's balance of
payments. Until the latter improves, fresh money won't come in, starving
the economy of much-needed liquidity. Without that infusion, debtors
won't repay creditors. And if the debt crunch continues, markets will
bet, correctly, that the demand for hard currency will exceed supply.
The result: further weakening of the rupiah and more bad news for
Indonesia's remaining banks.
Strapped for cash, the banks also can't reduce interest rates
short term. According to a study by the Institute for the Development of
Economic Analysis, a London-based economics consulting firm, Indonesia's
domestic banks have access to only 10%-15% of the cash available in the
country's financial system. To keep banks afloat, Bank Indonesia has
been creating liquidity by running its printing presses overtime -- and
in the process has been flouting an IMF requirement of only 16% annual
growth in money supply (See related illustration -- FEER April 16,
But at the core of Indonesia's creeping economic paralysis is
huge corporate debt, of which $62 billion falls due by end-1998. There's
little chance of Indonesia being able to pay so much so quickly, says
Chris de Konig, ABN Amro Bank's country head in Jakarta. What is needed
-- and quickly -- is a concrete plan to solve corporate debt. "Anything
substantive which assigns roles and responsibilities to the three major
parties -- government, creditors and borrowers -- would be better than
the fog we face now," says Drake Pike, managing director of Tokai Asia
in Hong Kong.
The United States can provide the necessary leadership to resolve
corporate-debt crisis in Indonesia, much like it did in Latin America
and South Korea, says Rajeev Malik, senior economist at Jardine Fleming
in Singapore. But the Americans might not be interested in the role, as
their exposure in Indonesia is not as high as it was in the other two
markets. Little he can also be expected from Japan, which is busy
fighting its own economic demons. "Japan is Asia's locomotive, so when
it is weak, it can't he others," says Kenneth Courtis, first
vice-president at Deutsche Bank in Tokyo. "When Mexico collapsed,
America was able to absorb Mexican exports. Japan is in no position to
back-stop." That said, Courtis believes Japanese banks have a huge
interest in stabilizing Indonesia. Although a late-comer in Indonesia's
loanfest, Japan is its biggest creditor.
Home-grown attempts to take charge have not gone anywhere. Tokai
Asia's Pike dismisses a high-powered corporate-debt resolution committee
set up by Jakarta as "a fine talking shop." A Hong Kong-based creditor
who attended one meeting quips that Radius Prawiro, a former finance
minister who heads the committee, plays a role similar to that of the
pope -- he comes in, blesses the congregation and leaves. Meanwhile, the
differences continue between creditors and debtors.
Clearly, some action is needed. Many companies are simply not
repaying foreign-currency loans -- and there's little creditors can do.
"When creditors call me, I tell them I won't pay. If they threaten to
sue us, I tell them, please do," a Jakarta-based firm's chief financial
officer says candidly. Legal officers at foreign banks say that while
loan covenants provide for arbitration in New York or London, there is
no guarantee of enforcement. "Even borrowers who can pay are now
defaulting frivolously, with a shrug, because they see no penalty in not
paying. They see everyone else not paying," says Tokai Asia's Pike.
Projecting the cash-flows of 35 large Indonesian industrial
commercial companies, a Jakarta-based brokerage concluded that only half
will have adequate cash to repay their debt, requiring a collective 40%
debt write-off and 17% rescheduling. However, economists argue that
banks expecting full repayment are being greedy. If the last cent is
extracted out of Indonesian debtors, they say the country will be pushed
into a Latin America-style, decade-long recession, as every dollar
earned will be used to settle old debt. New investment will dry up, and
domestic interest rates will remain high.
A better alternative is a bankruptcy law, says Michael Backman,
Australian author on Indonesia. He says such a law should be enforced
immediately, so that defaulting companies can be wound up and their
assets sold. Right now foreign investors are looking for assets to buy,
but very little is for sale. "Such asset sales would take some pressure
off the rupiah and surviving Indonesian companies would have their
dollar-debt loads reduced in rupiah terms," says Backman.
Instead, Bank Indonesia may be taking on risky commitments.
more money into the system will increase fiscal pressure, especially if
the government takes over more banks. Jakarta is also maintaining
subsidies for food and energy, a point on which the IMF has relented,
keeping in mind the recent social unrest triggered by soaring prices of
basic commodities. In the end, one fundamental question still remains.
"Do investors and lenders believe that a Suharto-led government is
likely to endure and deliver a sound economic policy environment?" asks
Andrew MacIntyre, an Indonesia expert at the University of California.
"My guess is that there is still an awful lot of doubt out there."