BUSINESS: Indonesia's bankrupt companies
Far Eastern Economic Review
Dec 25, 1997

Face the Music:
 Indonesian firms scramble to find survival strategies
  * By Salil Tripathi in Jakarta
    1440 Words

For a bird's-eye view of Indonesia's financial crisis, spend a few
hours in Usman Atmadjaja's office. High atop the Jakarta headquarters of
Bank Danamon, Chairman Atmadjaja is fielding phone calls from a group of
U.S.-bound Indonesian businessmen, led by Finance Minister Mar'ie
Muhammad, in transit at Tokyo. Their mission: to restore confidence in
Indonesian business and get international lenders to roll over the
country's $65 billion corporate debt.
   But they and Atmadjaja know that Indonesia is a pretty hard sell just
now. On this bleak Thursday morning, Jakarta stocks are falling and the
rupiah has plunged into an abyss. With each downward lurch of the
currency, Indonesia's foreign-debt burden grows bigger. A sick President
Suharto hasn't been seen in public for a week, fuelling market jitters.
Perhaps half of the corporate sector would be closed by now, analysts
say, if Indonesia's bankruptcy process were more streamlined. Tight
money has reduced working capital to a minimum, putting bonuses and even
salaries at risk.
 Outside Jakarta, a severe drought is raising the prices of
agricultural goods while reducing consumer demand from rural areas -- a
good recipe for recession. Unemployment is on the rise, thanks to Mother
Nature as well as to the financial crisis. The Ministry of Manpower
Planning estimates that the crucial forestry industry has lost 23,000
jobs, and the banking sector 16,000 since the summer.
   As if to put a point on the situation, even the weather is dismal.
"Look at this," says Atmadjaja, gesturing towards the grey skies
outside. "It's morning but there is no sunshine."
   Likewise for Indonesia Inc., which won't see sunny days again until
the rupiah finally bottoms out -- and it's anyone's guess when that will
be. Even then, Indonesian companies will have to make some painful
changes if they are to reopen international credit taps and win back
investors, both foreign and domestic. They will have to become more
transparent and focus on businesses they know best. And they will need
to take such immediate steps as preserving cash and postponing expansion
projects. Although it is still early days, there is evidence that some
bigger companies are making such moves:
   -- Preserve cash: Car-industry leader Astra International is bracing
for hard times. President-Director Teddy Rachmat admits that some of his
businesses will be "severely" affected and that sales of the Kijang and
other popular car models may drop 50% next year. Demand for the Honda
motorcycles that Astra assembles will fall by at least 20%, he says.
Astra's cars contain many imported parts that become more expensive as
the currency falls; to keep in step, the company would have to raise
prices by 4% for each 10% drop in the rupiah's value.
   Rachmat hopes tight purse strings will he see Astra through the
difficult year to come. "We will preserve cash," he says. "This means
efficient use of working capital, no excess inventories, and no
accounts-receivable. We've got to get the cash flow flowing and forget
making profits for the moment. We'll be happy if we break even."
   Like many Indonesian companies, Astra itself is partly to blame for
its problems: It borrowed heavily. Of its 5-trillion-rupiah ($935
million) debt, 60% is in foreign currency and 35% of that matures in
less than a year.
   Cash is also king at Lippo Land. In early December it recorded net
profit of 62 billion rupiah, but decided to issue no dividend in order
to strengthen its working capital. Managing Director Eddy Sindoro says
Lippo Land's debt-equity ratio is 57%, low by the standards of listed
Indonesian companies. But Lippo Land is nonetheless playing it safe,
focusing on core areas (urban development) while trimming payrolls and
redeploying staff from headquarters functions to marketing and sales,
where it is intensifying efforts to move existing projects. Sindoro says
he will concentrate on maintaining low leverage, while using Lippo's
strong credit history to obtain long-term funds at low interest rates.
   -- Delay development: Ciputra, Indonesia's largest residential
developer, doesn't have a choice. Its monthly sales averaged 400 units
for the first eight months of 1997, then plunged to 17 in September.
Managing Director Harun Hajadi blames that on the collapse of the
mortgage market. Stung by defaults, banks have all but stopped lending.
According to a SocGen-Crosby study, 12.1% of all credit extended by
Indonesian banks is nonperforming (three to 12 months overdue), up from
9% a year ago. SocGen-Crosby expects the figure to rise to 17.7% in
   Hajadi hopes state-run banks will enter the market and replenish
liquidity, but analysts say state lending will be directed at
lower-income families, not the upper-income groups that are Ciputra's
market. Ciputra's foreign-currency debt totals $280 million, $20 million
of which is due in February and $70 million in July. To spur sales,
Hajadi says, Ciputra will offer a one-time, one-year interest subsidy to
home buyers. The group has also sold some projects to other developers.
While Hajadi says none of Ciputra's current projects is stalled, he
concedes that it has no new plans for its huge landbank. "We have never
faced such a crisis," he says.
   -- Take your losses (if you can): The world's largest instant-noodle
maker, Indofood Sukses Makmur, has a balance sheet strong enough to
absorb a foreign-exchange loss that by early December totalled 980
billion rupiah. Thanks to its deep pockets, Indofood is one of the few
Indonesian firms not in denial by trying to delay the inevitable
write-off. The company is part of the cash-rich Salim group, which has
long expanded by playing white knight to troubled firms and has become
what an analyst describes as the "buyer of last resort."
   Being in a relatively recession-proof industry, Indofood actually
expects to improve its performance next year. While company officials
conservatively predict that sales will rise from 7.2 billion packets in
1997 to 8.3 billion in 1998, one analyst expects revenues to rise as
much as 40% in rupiah terms. His reason: The cost of rice is rising,
prompting low-income families to replace it with cheaper instant
noodles. But Indofood isn't banking on a sales bonanza; it too has
curtailed expansion plans. "Typically we allow capital-expenditure
expansion when plants reach 70% capacity," says a company official. "Now
the threshold will be 90%."
   -- Bring in the foreigners: Bank Danamon has shown the way. Hit hard
by the market turmoil and eager to raise cash, the Atmadjaja family
diluted its control by selling a 29% stake in late November to Salim and
Credit Suisse First Boston. (The family's stake falls to 19%; Salim
picks up 19% and CSFB 10%.) "This is a panic wave," says Chairman
Atmadjaja. "We have to react in good time." Though no other deals have
been announced, Indonesia's banks are struggling and analysts feel
Danamon's move is just the beginning of an industry consolidation.
   Still, such defensive strategies alone won't make 1998 a happy new
year for corporate Indonesia. Some companies admit difficulty in paying
the traditional year-end bonus, due before the holy month of Ramadan,
which begins in late December. Others will find it tough to pay February
salaries and maintain their debt-repayment schedules. Already, thousands
of employees in construction, forestry, financial services and light
manufacturing have lost jobs. The Jakarta skyline is dotted with cranes,
but few are moving. Property consultant Jones Lang Wootton predicts
oversupply in all sectors of property.
   Consumer demand is stagnating, if not falling. The Ramayana
department-store group has closed some outlets, and mid-market fashion
group Mata Hari is reassessing its stores in drought-hit central Java.
Sales of sedan cars nationwide dropped to 3,147 in November from 4,583
in July. Anticipating a downturn in outbound travel from Indonesia,
three travel agencies have closed, says economist Shahrir. Real-estate
projects are being deferred and in some cases dropped, adds HSBC James
Capel Research Director Jonathan Harris.
   Things will get worse before they get better, according to
Jakarta-based consultancy Castle Group. It recently applied the widely
respected "Altman-Z test" to the 194 companies listed on Jakarta's stock
exchange. Designed to indicate the likelihood of failure, Altman-Z
measures such things as working-capital levels, retained earnings and
sales in relation to assets, and debt in relation to equity. The
results: Only 7% proved healthy, while 145 appear headed for collapse.
And this is before taking into account the impact of the rupiah's
depreciation on their debt.
   Privately, some companies are on the block. A venture-capital fund
manager who not so long ago had trouble getting his phone calls answered
now has a queue of businessmen waiting to meet him. "And they are
willing to sell whole companies," he says, "not just small stakes."
   Perhaps Indonesia's year of living dangerously is just beginning.