RI gains bargaining power in securing overseas loans

Mon, 05/05/2008 11:26 AM  |  Business

The late 1997 Asian financial crisis gave Indonesia a hard-core push to overhaul its overseas debt management.

With some headway made in dealing with debts, the country is now becoming less dependent on foreign creditors, as well as gaining stronger bargaining power in negotiating sovereign loans.

As stated in the revised 2008 state budget, Southeast Asia's largest economy now needs Rp 26.4 trillion (US$2.86 billion) of overseas sovereign loans to help plug an estimated budget deficit of Rp 94.3 trillion.

The Jakarta Post's Rendi Akhmad Witular recently interviewed Mahendra Siregar, the deputy coordinating minister for the economy in charge of international economic and financing cooperation, on the country's sovereign debt management. Here are excerpts of the interview:

Question: In general, how is the government managing its sovereign debts now? Answer: Our debt management, in general, has drastically changed from that normally practiced before the (1997 Asian financial) crisis. At that time overseas soft loans were entirely allocated to plugging the state budget deficit. The loans were raised from bilateral and multilateral means.

There are three points I would like to emphasize about our current state of debt management. The first is that now we have a number of other instruments for raising debts, such as bonds offered domestically and internationally. Therefore, we can assess which is more feasible for us.

The second is that Indonesia is no longer categorized by the international community as a developing country with a low income. We are now moving up to the category of a developing country with a medium income. The impact is that we are no longer eligible to receive soft loans such as those through the World Bank's Official Development Assistance (ODA) scheme.

The third is that in the past our debts largely consisted of soft loans and grants. Soft loans were mostly related with projects. But now, the debts only consist of those for projects and programs. Debt for programs are basically in cash, and are allocated for easing the state budget deficit. The government has flexibility in determining the allocation for program loans.

Based on that, past mechanisms such as through the Consultative Group on Indonesia (CGI), ended by the government last year, are no longer feasible for settling our needs of overseas financing.

In the past, the CGI mechanism was deemed sufficient to settle all of the country's problems.

But now, we are no longer heavily dependent on one source like in the past. While our state of financing is getting more complex, we now have a number of other mechanisms for raising debts at very feasible terms.

That is why we have stronger bargaining power now. We have the option not to receive loans which carry requirements that we consider too much or too burdensome to comply with. A possibility for certain creditors to force us in complying with their burdening requests is thus getting more limited. We can always choose different mechanisms and sources.

What are terms and conditions the government set out in negotiating overseas loans?

We have several benchmarks or terms and conditions when negotiating the loans. But in general we are emphasizing maturity and grace periods and interest rates. It is difficult to cite the exact benchmark because there is always a periodical update.

But in general we are proposing a seven-year grace period with 10 years of maturity. But really the benchmark varies.

There is the accusation that our debt management still lacks transparency, especially for the terms and conditions demanded by donor countries or agencies. How do you respond to this?

That is not true. We already have a blueprint for our foreign financing. Its allocation and disbursement are already clear. There is already transparency on the amount of debts we receive. And during the signing (of the loan contract) we always invite the media. There is also a mechanism for planning, proposing and payment already set out. So it is very transparent.

What the international community is focusing on now is the effectiveness of the loans, its level of absorption, implementation and results. We are now focusing on improving these kinds of systems and benchmarks.

Is there any special interest from creditors in exchange for approving the loans? For example, a request for trade privileges?

If it is related with projects, all creditors have their own requirements. For example, Japan has set out a regulation for all countries receiving its soft loans to include the participation of Japanese parties, meaning its private sector.

I can only say that each lender varies in lending conditions.

Which creditors is the government eying now?

Japan is still the largest contributor of loans for projects. Their terms and conditions, as well as interest rates and debt allocations, are still more competitive than any other creditors. Their requirements are lenient and feasible for us. And the payment is made in yen.

For the deficit, we are depending now on the World Bank and Asian Development Bank.

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