Country Experiences of Indonesia on External Debt Management

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Country Experiences of Indonesia on External Debt
Management
Presentation Material
Regional Workshop on Capacity-building for
External Debt Management in the Era of Rapid
Globalization,
Bangkok, 6-7 July 2004
Kusumaningtuti S. S. Bank Indonesia
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• Topic of Discussions
• External Debt Crisis historical and recent
  experiences
  
• Policy Directions on External Debt
• Debt Resolution and Its Consequences
• Indonesias Debt Management current external
  debt management and its consequences
  
• The challenges in managing external debt
• Conclusion

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1. External Debt Crisis historical and recent
experiences
Background The need for external financing
1. Saving - Investment Gap - Domestic savin
g ivate investment 2. Foreign Exchange/External Gap
3. Interest rate differential
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1. External Debt Crisis historical and recent
experiences

• Factors triggering the excessive external debt
  exposure
  
• Building up of external debt stock due to the
  policy to improve the role of private sector as
  agent of development
  
• 2. Currency risk relatively measurable because
  exchange rate is relatively stable foreign
  exchange policy of annual rupiah depreciation
  against USD around 5. This encouraged business
  sectors to borrow from abroad.

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1. External Debt Crisis historical and recent
experiences

• Factors triggering the excessive external debt
  exposure
  
• Lack of liquidity of the economy due to tight
  money policy imposed by monetary authority to
  maintain a single digit inflation, increasing the
  domestic interest rate, borrowing from abroad
  more favourable.
• Limited domestic non-bank sources of fund because
  of undeveloped domestic capital market.
  

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1. External Debt Crisis historical and recent
experiences
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1. External Debt Crisis historical and recent
experiences
The development of external debt exposure
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1. External Debt Crisis historical and recent
experiences
The development of external debt exposure
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1. External Debt Crisis historical and recent
experiences
The development of external debt exposure
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1. External Debt Crisis historical and recent
experiences
Debt Burden Indicators of Indonesias external
debt
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1. External Debt Crisis historical and recent
experiences
Debt Burden of Indonesias external debt
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1. External Debt Crisis historical and recent
experiences
Debt Burden of Indonesias external debt
The flows of government debt shows negative net
flows, (some of due to the disbursement vs policy
matrix implementation). It is estimated that de
bt service obligations will be over 40 of
government revenues for the next few years
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2. Policy Directions on External Debt

• - Resolving debt burden to ease the pressure
  over budget deficit during the crisis (1998)
  and beyond through available rescheduling from
  Paris Club and London Club.
• Utilize debt swap facility option available from
  Paris Club.
  
• In the medium long-term, to lessen the
  countrys dependence on external resources and
  achieve safe level of public debt to GDP ratio.
  

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2. Policy Directions on External Debt

• With limited option (no Paris Club Rescheduling)
  after discontinuing IMF Program in 2003, find
  other sources to finance budget deficit and
  refinance debt. Issuance of global bonds.
• Develop domestic capital market
• Fiscal conservative, decrease budget deficit, the
  ratio of budget deficit to GDP projected in 2004
  1.2, 2005 0.8 and 2006 0.5.
  
• Issuance of public debt regulation

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2. Policy Directions on External Debt

• For private external debt
• - Central Bank monitoring through monthly
  external debt reporting - an early warning
  system and consideration for policy direction
  
• Expecting a regulation concerning prudential
  borrowing guidelines to avoid re-occurrence of a
  condition where the private sectors external
  debt exposure become excessive and slips out of
  control.

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3. Debt Resolution and Its Consequences
Public debt
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3. Debt Resolution and Its Consequences
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3. Debt Resolution and Its Consequences
Debt Swap
Germany England France
DM50 million Debt for Education swap
GBP100 million expected another GBP100 million
USD65 million
Canada Finland New Zealand Italy Sweden
Agreed but have not decided the amount of debt to
be converted
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3. Debt Resolution and Its Consequences
Government of Indonesia actually still has to pay
a large number of its external debt obligation
for multilateral debts. By the end of April 2004,
the governments multilateral debts recorded
USD29 billions or 36.8 of total government
external debt.
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3. Debt Resolution and Its Consequences
Arguments against Paris Club rescheduling

• Governments debt problem is rather shifted than
  resolved.
  
• The rescheduled amount is too little compared to
  governments total debt burden and stock.
  
• Creditors provided unfavourable terms condition
  for government.

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3. Debt Resolution and Its Consequences
Private debt
In favor of private external debt problem,
Government established a team called Private
External Debt Solution Team. On June 4, 1998 the
team reached an agreement with Bank Steering
Committee in Frankfurt, called the Frankfurt
Agreement. Three points of the agreement in priva
te external debt restructuring program are
1. Inter-bank Debt Exchange Offer
2. Trade Maintenance Facility.
3. Establishment of INDRA and JITF (Jakarta
Initiative Task Force)
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3. Debt Resolution and Its Consequences
Inter bank debt exchange offer program
Target reducing short term foreign
exchange liquidity problem
facing by the banking sector.
1st exchange offer eligible obligations
falling up to March 31, 1999 (inter-bank
deposit, SML term-debt, arrears and derivatives
signing prior May 1, 1998). 2nd exchange offer
eligible obligations falling due between
April 1, 1999 up to December 2001 (inter-bank
deposit, SML term debt, stand-by L/C,
derivatives signing prior March 1999 and trade
finance 1 year - Any default payment will
be guaranteed by BI and MOF (cou
nter guarantee) - Total Debt successf
ully exchanged USD 6.3 billion
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3. Debt Resolution and Its Consequences

• TRADE MAINTENANCE FACILITY
• Target Maintaining a sustainable trade
  financing
  
• Criteria of eligible debt to be restructured
  
  
• The government guarantee for default payment
• Temporary (short term guarantee for one year
  period (the guarantee has been extended to Dec
  2000)
  
• Maintaining bank submitted a commitment letter
  for channeling a certain level of trade financing
  to Indonesian Bank through BI.
  

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3. Debt Resolution and Its Consequences
Target
- Maintaining bank should submit a
conformation letter to BI. - The Indone
sian banking institutions chosen by the
foreign bank (excluded frozen/liquidated/sus
pended banks). - Foreign partner Bank
should report their financing to
central bank (monthly)
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3. Debt Resolution and Its Consequences
Establishment of Indonesian Debt Restructuring
Agency (INDRA) This institution provides exchan
ge risk protection and assurance as to the
availability of foreign exchange to private
debtors that agree with their creditors to
restructure their external debt for a period of
eight years, with three years of grace during
which no principal will be payable.
Only deals with one client, still functioning
until 2006
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Jakarta Initiative Task Force (JITF)
3. Debt Resolution and Its Consequences

• As one piece of the Governments overall
  restructuring strategy, it has created JITF to
  serve as a mediator and facilitator of specific
  restructuring cases, particularly those involving
  foreign lenders.
• Stick Carrots in mediation process i.e. tax
  incentives, capital market incentives, and
  recommended to the authority to impose the
  bankruptcy law to the debtors that have a bad
  attitude in dealing with the process of
  restructuring.
• Total USD20.5 billion (incl. domestic USD loans)
  rescheduled until its closure in 2003
  

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4. Indonesias Debt Management current external
debt management and its consequences
Existing system

• Institutional framework set up for public
  external debt management is scattered among The
  National Development Planning Agency, Ministry of
  Finance, Bank Indonesia, as well as other
  ministries concerned.
• This triggers several weakness such as
• Coordination among institutions time consuming,
  e.g. reconciliation data requires for
  disbursement and repayments.
  
• Limited analysis e.g. debt sustainability
  analysis, Benchmarking, risk management
  

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4. Indonesias Debt Management current external
debt management and its consequences

• Limited implementation of debt management
  principle
  
• Non integrated and minimum function of front,
  middle, and back offices for Public external debt
  management.
  
• The conduct of public debt management has been
  under the Debt Management Unit within the MoF,
  and supported by central bank.

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4. Indonesias Debt Management current external
debt management and its consequences
Steps in managing external debt
1. PLANNING Designing the needs A
mount, Sources, Project/Programs to be
Financed using External Funds, to be in line
with National Development. Planning.
? Technical Ministries/Department proposed
list of project/programs for the next FY (6
month prior to the term) to MOF.
? Discussions between Coordinating Ministry
for Economic and Industry, MOF and National
Development Planning Agency for projecting the
need for external funds as a part of the next
Governments Budget Plan. ? Result of discu
ssion is documented on a book namely The Blue
Book ? The Book becomes the only document to b
e discussed with the lender parties.
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4. Indonesias Debt Management current external
debt management and its consequences
2. NEGOTIATING PROCESS ? Disc
ussing with the lenders/creditors on
Designing the commitment amount/pledge from
each members countries.
Indonesias delegation
consists of officials from
Coordinating Ministry for Economic and
Industry, Ministry of Finance, National Deve
lopment Agency, and Central Bank.
? Bilateral negotiation between GOI and
prospective creditors. on the terms and cond
ition
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4. Indonesias Debt Management current external
debt management and its consequences
3. SIGNING LOAN AGREEMENT
? MoF on behalf The Government of the Republic
Indonesia ? Bank Indonesia under Power of Attor
ney given by MoF. 4. DRAWING Th
ere are four types of disbursement mechanism
? Letter of Credit Special account
through Bank Indonesia ? Direct Payment Reim
bursement through MoF
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4. Indonesias Debt Management current external
debt management and its consequences
5. REPAYING Settled by Bank Indonesia based on
schedule and formal instruction from MoF.
6. RECORDING DATA MAINTAINING By BI and Mo
F
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4. Indonesias Debt Management current external
debt management and its consequences
The role of Bank Indonesia in debt management
FISCAL AGENT

• advising on policy direction of public external
  debt, term and condition and negotiation of loan
  agreement i.e. Paris Club and London Club.
  
• recording and maintaining external debt
  statistic.
  
• conducting disbursement and repayment.
• disseminating external debt data.

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5. The challenges in Managing external debt

• Develop effective public debt management in
  accordance with best practice, It is starting
  with MoF reorganization.
  
• Improving legal aspect with the issuance public
  debt regulation
  
• Tax Policies Reforms, improve government spending
  efficiency
  
• to decrease budget deficit the ratio of budget
  deficit to GDP projected in 2004 1.2, 2005
  0.8 and 2006 0.5.
  
• gradually to lessen the countrys dependence on
  external resources. Developing domestic bond
  market
  

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5. The challenges in Managing external debt
Debt Indicators Projection of Indonesias
external debt
The condition will be achieved through increasing
Foreign Direct Investment and exports
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5. The challenges in Managing external debt

• Central Bank as Fiscal Agent
• Improving the role to functioning the front and
  middle office Develop Investor Relation Unit,
  and Overall study in debt management e.g. Bench
  marking, debt sustainability analysis, risk
  analysis
• Improving external debt administration
• DMFAS (UNCTAD) system is implemented for
  government external debt
  
• External Debt Information System (EDIS), web
  based reporting system, is implemented for
  private external debt
  

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6. Conclusion

• Expecting the new government (after the general
  election this month) will continue the policy
  direction to solve external debt set by the
  previous government
• Bank Indonesia will improve its role in front
  office with developing Investor Relation Unit
  (IRU), middle office function with its advisory
  analysis, and back office with improving its
  external debt administration system