Indonesia: can it move on?

07 August 2000 00:00  [Source: ACN]

Indonesia's economy is under renewed threat. Efforts over two and a half years to achieve sustained recovery could be wrecked by political and social instability. Michelle Ng reports

When Indonesia plunged into economic crisis in August 1997, many hoped it would be well on its way to recovery within two years. But three years on, the country is still battling to find political, social and economic stability. The lack of such stability is posing a serious obstacle to attempts to revive the country's petrochemical industry.

And now, the industry is being rocked even further by suspicions of sabotage. In July, two storage tanks belonging to Humpuss Aromatic in Arun exploded, while later the same month, Pertamina's refinery in Bulongan was forced to shut down, spurring a massive rush in Jakarta by motorists stocking up on gasoline. The incidents add to a growing list of concerns facing the industry. The recent volatility of the rupiah is thwarting sales amid reluctance by customers to pay in rupiah for sales contracts negotiated in dollar terms.

Domestic demand is still too weak to meet the new capacity which came onstream just as the economic crisis hit, limiting operating rates to 50-60% for some producers. And the uncertain political future is posing an increasing threat to further investment and to debt restructuring efforts.

Industry observers now fear that attempts to rebuild the Indonesian economy over the past few years could come undone. These efforts - which include restructuring corporate and bank debt, the reform Indonesia's laws, and the promotion of foreign investment and exports -- are now hanging in the balance. The extent of this undoing will become clearer this month. On 7 August, Indonesian President Abdurrahman Wahid will face the nation's highest legislative body, the People's Consultative Assembly (MPR), during which he will have to account for his first 10 months in power. He is expected to face severe criticism from legislators and the general public for his alleged economic mismanagement and erratic political statements.

Tension over claims that former president Suharto is unfit to stand trial for alleged corruption has also sparked sporadic outbursts of violence in Jakarta.

President Abdurrahman is, at the same time, facing mounting international pressure to end the sectarian violence in the Maluku islands. Some members of the United Nations Security Council were reported to have said they wanted international troops deployed to end the violence.

The domestic and international pressure, coupled with concerns of President Abdurrahman's frail health, have contributed to increasing volatility in the value of the rupiah, which is already down more than 20% since the beginning of this year.

The rupiah, which was at Rp9065:US$1 as ACN went to press, was expected to fall further to Rp9800:US$1 by the end of Q3 this year. Asahimas Chemical vice-president-director Takao Tsunoda told ACN the PVC producer is bracing itself for a possible plunge in the rupiah to Rp11-12 000:US$1 in the worst-case scenario. This has spurred Indonesia's central bank, Bank Indonesia, to hike its benchmark interest rates to six-month highs of more than 13%. The central bank's decision not only increases the interest burden on bonds issued as part of a bid to recapitalise Indonesian banks. It will also increase corporate debt burdens.

Economists are closely following the political and social developments as they assess how former estimates of full-year growth could be altered.

One source said while he earlier predicted full-year growth of up to 4.5% in 2000, he could now be looking at closer to 3.4% this year.

This is in stark contrast to 1999. That year, economic growth surpassed expectations and reached a full-year growth of 0.3% instead of the expected 0% growth. In 1999, inflation was also significantly lower than expected, while the exchange rate was at Rp6000-7000:US$1.

One of the biggest concerns now confronting the industry is the impact of the weakening rupiah on the restructuring of corporate debt.

Indonesia's chief economics minister Kwik Kian Gie reportedly said that the government is considering scrapping debt settlement pacts signed with some of Indonesia's top business groups, including the Gajah Tunggal Group and the Salim Group.

This is on the grounds that the price of assets under the management control of the conglomerates has deteriorated since the agreements were signed, said press reports.

Kwik added in the reports that the debt pacts give the groups' management legal immunity. This immunity covers any court findings that the groups' banks have exceeded the legal lending limit to group affiliates. The debt pacts were signed under the previous government.

Both the Salim Group and the Gajah Tunggal Group hope that the debt agreements will remain in place.

Scepticism is high that the agreements will be nullified, say Indonesian sources who believe the government's credibility could be tarnished if it made the agreements void.

Sources were also concerned that if the debt pacts are scrapped, the sale of the groups' assets will be set back. Such assets include ethylene glycol producer GT Petrochem Industries, a Gajah Tunggal Group company now majority-owned by the Indonesian Bank Restructuring Agency (Ibra). Salim assets include caustic soda producer Sulfindo Adiuhasa, and Sulfindo's stakes in VCM producer Satomo Indovyl.

Sources also say it is possible that the weakening rupiah and emerging prospects for slower-than-anticipated economic growth this year could lead to fresh complications in attempts to restructure the debts of petrochemical players. Chief among concerns is that debt repayment schedules, which assume improved cash flow partly because of a strengthening rupiah, will have to be revised.

Already, Polysindo Eka Perkasa has indicated that the weakened rupiah is worsening its liquidity position. Polysindo says its customers are stalling payments in the hope that the currency will strengthen and stabilise (ACN 17 July, p14). Polysindo explains that it settles the prices it charges customers in dollar terms. The bills are later settled in rupiah at the prevailing exchange rates.

If any cash flow projections need to be revised, the slowdown in the pace of restructuring will be significant. Already, Indonesia is coming under substantial attack from detractors who argue that restructuring efforts are too slow.

One industry source says Indonesia has completed only 30-35% of its target for this year for the sale of assets totalling Rp220 000bn, raising fears within the country that the International Monetary Fund and other sources of financial aid may be unwilling to extend fresh help to Indonesia in the future. Companies undergoing debt restructuring, however, say their restructuring attempts are on track.

Polysindo investor relations spokesman Joydeep Mazumdar stressed that the creditors and the company are 'close to agreement', and a new termsheet is expected to be completed by the first week of August. The restructuring deal is expected to result in a swap of a portion of Polysindo's debt for equity by its creditors. Polysindo is restructuring debt worth US$450m it owes to holders of its unsecured notes, as part of a Rp16 600bn debt restructuring of its parent company, the Texmaco group. The portion of Polysindo's debt previously held by Bank Negara Indonesia is now being controlled by Ibra.

Another Indonesian player, TriPolyta, is also close to reaching a final agreement with the holders of its US$185m unsecured bonds. The PP producer has reached an in-principle agreement with more than two-thirds of its creditors, but needs approval from all creditors before the restructuring agreement can be implemented.

In its proposed restructuring termsheet, the company will be given a two-year extension on the maturity of the bonds to 2005. Bondholders will also offer to discount the unpaid interest dues, worth US$31.6m, by 50%. If the company is unable to pay this discounted interest by a certain date, TriPolyta is to issue fresh bonds to creditors worth US$31.6m, which will be convertible to a total 15% stake in the company.

TriPolyta is also in discussions at present to restructure royalty payments it owes to Union Carbide. TriPolyta stopped making these payments in 1997. The outstanding royalties payable, excluding the withholding tax, were US$4m, US$7m and US$10.8m for 1997, 1998 and 1999 respectively. But the implications of the present political uncertainty are slightly different in the case of Chandra Asri. Mounting scrutiny of President Abdurrahman's actions have spurred substantial re-negotiation of an in-principle agreement reached in May this year between major Japanese stakeholder Marubeni Corp and Ibra.

The in-principle agreement, which sought to restructure the cracker operator's debt of US$1.14bn through a swap of debt for equity and the extension of the repayment of debt, was approved by President Abdurrahman later the same month.

However, the agreement came under severe criticism from Indonesian players and international observers, many of whom argued the deal favoured Japanese interests.

As a result, negotiations on the restructuring of the debt have continued in a bid to persuade the Japanese to grant further concessions. The proposed concessions include a further three-year extension on the debt repayment schedule to a total of 12 years, and the right to purchase naphtha from and to sell pyrolysis gasoline to sources other than Marubeni.

The increasing volatility of Indonesia's political and social environment is also seen as a major threat to attempts to increase foreign investment. Observers fear waning foreign investor interest in buying out local partners' stakes in Indonesian ventures. They believe that foreign investment is necesssary for restructuring. According to the Ministry of Investment, 102 companies with domestic investment were reclassified as foreign investment projects, which had a total project value of US$1.58bn in 1997. The number of companies which were reclassified in 1998 rose to 128, for projects valued at US$2.74bn. Figures for the full-year 1999 were not available as ACN went to press.

In the petrochemical industry, this trend has been marked. Dow Chemical has purchased the 50% stake held by the Salim Group in their polystyrene joint venture. Tosoh Corp and Mitsui & Co also took over their Indonesian partner's stake in PVC producer Standard Toyo Polymer, to form the first chemical player to be wholly owned by Japanese interests. The most recent example of this trend was the sale of TriPolyta's 45% stake in acrylic acid produce Nisshoku TriPolyta Acrylindo to joint-venture partners Nippon Shokubai and Tomen Corp in June this year (ACN 16 June, p5).

At present, efforts are being focused on the sale of stakes in Indonesian companies held by Ibra. However, concerns are high that the prevailing political and social instability could thwart Indonesian attempts to attract what Indonesian players consider 'fair value' for the assets.

Ibra currently holds substantial stakes in several petrochemical players, including an 80% stake in Chandra Asri and a majority stake in GT Petrochem.

Ibra is also overseeing the restructuring of debt in other petrochemical players such as Polysindo and Bakrie Kasei. This is part of attempts to restructure debts held by the parent companies of these players.

Government sources also admit it is difficult to remain sanguine over the prospects of attracting investment for new projects, in spite of persistent efforts to boost investor interest.

In July, a Japanese delegation visited Indonesia to evaluate an Indonesian proposal to expand the fertiliser industry. Agus Wahyudi, director of the Ministry of Industry and Trade's organic and agrochemical division, told ACN that the team was headed by the Japan Bank for International Co-operation (JBIC). '[The delegation] held discussions with the ministry on 26 July, and will meet some financial institutions to hold preliminary discussions on 27 July,' Agus said. But even he admits that the investors are unlikely to increase their stake currently, given the political uncertainties.

The present volatility is also thwarting tentative attempts to improve the liquidity of trade financing. A new export financing scheme which will give major exporting companies access to up to US$500m in credit was unveiled last month by Fortis Bank, but even the bank admits that only companies meeting the bank's strict criteria will be able to benefit from this scheme.

Other companies are expected to see the liquidity crisis persist. The factors which led to tightening liquidity are still present - local banks are cautious of exceeding their lending limit, while foreign banks frequently refuse to recognise letters of credit opened with Indonesian banks. Players such as TriPolyta admit they have little choice but to agree to the banks' demands for 100- 110% cash deposits before they are allowed to open letters of credit.

Sources, however, applauded moves by the government to reform Indonesia's laws and regulations. A Jakarta-based academic says legal reform, particularly relating to the economy, is expected to create the legal infrastructure which will better serve Indonesia's needs.

'The existence of the Commercial Court and the antitrust and antimonopoly laws reassures investors that, following the crisis, conditions in Indonesia will be much improved,' the source says.

Also in late-1999, the Indonesian government introduced legal reform to enable foreign investors, whether individual or companies, to purchase shares in holding companies of local companies.

'It is hoped that this decision will increase the interest of foreign investors in strategic investment in Indonesian companies,' says a Ministry of Investment source.

Clearly, attempts have been made since the start of Indonesia's economic crisis to gradually steer the petrochemical industry back to the growth levels experienced before the crisis.

Observers have no doubt that the steps being taken will pave the way to a better investment environment capable of attracting and sustaining key future foreign investment. But how far such progress will be frustrated by the present political and social volatility remains to be seen.

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