This Selected Issues paper takes stock of the progress made in meeting the objectives under Indonesia’s Extended Arrangements (1998–2003) program. The paper addresses progress in achieving the programs’ core macroeconomic objectives, with an emphasis on how Indonesia’s economic recovery compares with those of the other major Asian “crisis” countries. A major conclusion of the paper is that, while significant progress has been made against many of the key objectives of the arrangements, Indonesia’s overall economic performance has lagged behind others in the region.

Abstract

This Selected Issues paper takes stock of the progress made in meeting the objectives under Indonesia’s Extended Arrangements (1998–2003) program. The paper addresses progress in achieving the programs’ core macroeconomic objectives, with an emphasis on how Indonesia’s economic recovery compares with those of the other major Asian “crisis” countries. A major conclusion of the paper is that, while significant progress has been made against many of the key objectives of the arrangements, Indonesia’s overall economic performance has lagged behind others in the region.

III. Was IBRA Successful?1

A. Introduction

1. The Indonesian Bank Restructuring Agency (IBRA) was established in January 1998 to handle government efforts to recover from the banking and economic crisis. The crisis decimated the banking and corporate sectors, and resulted in a widespread loss of public confidence in the banking system. To address the crisis and its aftermath comprehensively, IBRA was tasked with three key objectives:2

  • Stabilizing and revitalizing the banking system. IBRA would restructure and recapitalize banks, and rapidly return them to private ownership. In addition, it would restore confidence in the banking system through its administration of the blanket deposit guarantee program.

  • Maximizing recoveries from taken-over assets. Recoveries would offset the

    Rp 650 trillion cost of the banking crisis.

  • Revitalizing the corporate sector. Restructuring corporate debt and returning taken over assets to private ownership would support real sector recovery.

2. With IBRA having ceased operations upon expiration of its official mandate in February 2004, now is an opportune time to assess whether it was successful in meeting these objectives. 3 To a certain extent, IBRA’s performance was determined by a number of outside factors. As IBRA recognized early in its mandate, strong support from the legal and judicial system, as well as the absence of outside interference, would be essential for it to implement its mandate successfully.4 Though IBRA was broadly successful in meeting its three key objectives, in the end it was hampered by weak support from these outside factors.

B. Stabilizing and Revitalizing the Banking System

3. IBRA assumed responsibility for managing a significant share of the banking system. After IBRA’s initial (unpublicized) move to place a number of distressed private banks under special supervision proved ineffective, more comprehensive measures were taken. In early April 1998, IBRA took over seven banks (representing 16 percent of the banking system),5 and closed seven deeply insolvent small banks, with deposits moved to a designated state bank. The smooth implementation of these measures was well-received and helped provide confidence that a comprehensive banking reform strategy had been adopted. (By contrast, the poorly-implemented closure of 16 banks in October 1997 failed to strengthen market sentiment.) Following detailed examinations of the condition of other troubled banks, IBRA undertook further interventions. By early 1999, IBRA had taken over nine additional banks—including BCA, Indonesia’s largest private bank (12 percent of liabilities), which had suffered relentless bank runs—and closed another 45 banks (including three which it had previously taken over). In addition, IBRA became the majority shareholder in seven banks that were recapitalized jointly with the original private owners.

4. IBRA’s objective was to return taken-over banks to private ownership as early as possible. It was originally expected that the divestment of IBRA banks would begin in 1999 and would occur gradually over IBRA’s life. However, bank divestment only began in 2002 with the completion of the sale of BCA (which had been long-delayed since its launch two years earlier). While part of the slow start reflected delays in recapitalizing and formulating business plans for the banks, it also reflected a lack of political support for bank divestment. The momentum increased following the BCA sale, and all but one of IBRA’s banks had been divested by early 2004. While it was originally envisaged that the original owners of the joint-recap banks would exercise their right to acquire IBRA’s stake (financed in part by recoveries from nonperforming assets removed from the banks), only one bank was resolved in this way (the others were handled in the same manner as the taken-over banks).

5. The bank divestment strategy generally worked well, but the stakes probably should have been divested sooner. The process used for divesting government holdings in taken over and joint-recap banks was transparent and market-based, and adequate recoveries were achieved (see below).6 However, IBRA was not always effective in addressing structural deficiencies or liquidity problems that emerged in the banks under its control. For example, structural weaknesses at bank BII (a joint-recap bank that was subsequently taken over) were not addressed early enough, due to a lack of political support for closure of the bank. Though BII’s financial condition eventually improved, this required repeated capital injections from the government.

C. Maximizing Recoveries from Taken-Over Assets

6. Recovering value from the assets and obligations transferred to IBRA was critical for offsetting the cost of the banking crisis and reducing public sector debt. IBRA was tasked with recovering value from three major asset groups:

  • Nonperforming loans transferred from closed, taken over, or state banks;

  • Industrial assets and debt obligations pledged by former bank shareholders in settlement of claims related to their violation of legal lending limits; and

  • Equity holdings in banks recapitalized by IBRA, and other bank assets (e.g., buildings, land, cars, and office equipment) acquired in the process of liquidating closed banks.

Nonperforming loans

7. The original strategy for recovery from nonperforming loans was tailored to the size of the obligation (Table III.1). Retail and SME loans, which were large in number but small in total value, were targeted for resolution through cash settlement (with interest and principal discounts) and through direct sales. Nearly 80 percent of these loans (by principal) were settled, at an average recovery rate of 33 percent, while the remainder was sold. Overall, recoveries from these loans were about 30 percent of the original principal. The majority of commercial loans were outsourced for debt servicing (and restructuring) to private banks, so as to allow IBRA to focus its restructuring efforts on corporate loans. However, as little progress was made by banks in resolving these loans, they were eventually returned to IBRA management and offered for sale with corporate loans.

Table III.1.

Nonperforming Loans Transferred to IBRA

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Source: IBRA (2004), “IBRA’s Accountability Report, 1998–2004,” p. 18.

8. For corporate loans, the original strategy aimed to enhance their value by restructuring and repackaging them before offering them for sale. The expectation was that IBRA, as a government agency with special enforcement powers, would be better placed to conduct restructuring negotiations than private creditors. The strategy was also motivated by the desire to return only solid (i.e., restructured) loan assets to a still-weak banking system. In order to reach comprehensive debt settlements for business groups, restructuring of individual corporate loans was done under the group concept, with particular emphasis placed on restructuring loans related to the largest debtors. To enhance loan value, IBRA aimed to improve corporate governance and managerial control in the debtor companies during the restructuring process. In addition, the adoption of industry-specific resolution strategies was expected to add further value to the distressed loan assets.

9. The strategy of restructuring corporate loans before their sale is likely to have unnecessarily delayed asset recovery without significantly enhancing asset value. Difficulties related to working out such a large number of loans, many of which involved complex provisions and/or lacked appropriate documentation, were compounded by poor cooperation from debtors, who had little incentive to advance the restructuring process.7 In addition, unstable macroeconomic conditions, with high interest rates and exchange rate volatility, complicated the assessment of a company’s debt servicing capacity. These factors considerably delayed the restructuring process, and hence asset recovery.

10. The restructuring process also raised governance concerns. In 2000, the granting of generous restructuring terms to some of IBRA’s largest debtors, most notably Texmaco, evoked strong criticism both domestically and from the international financial institutions.8 Subsequently (in April 2001) the government adopted more stringent Corporate Debt Restructuring Principles. In addition, IBRA’s Oversight Committee (OC) was tasked with carrying out an independent review of the largest corporate restructuring transactions before they were submitted to the government for final approval.9 Though the recommendations of the OC were not binding, the fact that they were published meant that the final restructuring terms agreed by the government would be subjected to somewhat greater public scrutiny.

11. A fundamental change in strategy occurred in early 2002, when IBRA essentially ceased restructuring all but the largest corporate loans, and began to offer unrestructured loans for sale. This strategic decision was based on the realization that the restructuring progress had stagnated, and had put at risk IBRA’s ability to complete the asset recovery process before the expiry of its mandate. In addition, IBRA was of the view that shifting the restructuring responsibility to the private sector would increase asset recovery, as investors would place value on the added flexibility to restructure the assets in accordance with their own financial and strategic considerations.

12. Consequently, the pace of corporate loan sales, picked up significantly in 2002 (Table III.2). In contrast to its first auctions, in which IBRA had offered only restructured loans for sale; “unsustainable debt” positions began to be offered for sale.10 In 2002, loans with a combined principal of Rp 110 trillion were sold, nearly five times the total between 1998 and 2001. Controlling for underlying loan quality, IBRA has assessed that the move to sell unrestructured loans did not adversely affect recovery rates. Until IBRA’s closure, the strategy remained to sell as many loans as possible, subject to a floor price determined by an in-house assessment of each loan’s fair market value.11 Loan sales were generally conducted in a transparent and market-based fashion, though some governance concerns arose related to the possibility that original owners were buying back their debts (through third parties). However, there was little that IBRA could do to prevent this from occurring; while IBRA required all bidders to affirm that they were in no way related to the original debtor, the agency was not in a position to verify or enforce this requirement.

Table III.2.

IBRA Loan Sales, 1999-2004

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Source: IBRA (2004), p. 22.

Includes bond receipts.

13. In part reflecting the delay in loan sales, the recovery rate for these assets has been somewhat weaker than those for other Asian crisis economies (Table III.3). In addition, the stock of assets acquired by IBRA’s asset management unit (as a proportion of total loans) was greater than for other countries. Including debt service and proceeds from the sale of nonloan bank assets, recoveries have amounted to 29 percent of the original loan principal transferred to IBRA.

Table III.3.

Recovery from NPLs in Asian Countries

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Sources: Data from national AMCs; and Fund staff estimates.

IBRA (2004). Based on all proceeds of IBRA’s AMC unit, i.e., debt service, cash settlement, and sales proceeds from NPLs and nonloan bank assets.

“Korea Asset Management Corporation: 2003 Annual Report. “

“Danaharta - On Track,” Danaharta press release, March 5, 2004.

There is also a substantial stock of NPLs at bank AMCs and TAMC.

Bank shareholders’ industrial assets and debt obligations

14. Unlike other Asian crisis economies, Indonesia sought recovery from bank owners whose use of emergency liquidity credits had violated prudential norms. The government reached out-of-court settlements under which the bank losses attributed to the breach of legal lending limits would be repaid. A total of 44 agreements were reached with major shareholders of banks, for obligations amounting to Rp 130 trillion (including five agreements, with total debt of Rp 0.2 trillion, that were settled upfront in cash). Another ten shareholders disputed their liabilities and refused to sign a settlement agreement. The cases of these shareholders were forwarded for legal action to the relevant branches of government.

15. The settlement terms depended primarily on bank shareholders’ ability to meet the obligation in kind. Nine agreements were reached in 1998 and 1999. For the five shareholders with assets (corporate holdings, property, shares, etc.) of sufficient value to meet the entire obligation, an agreement (MSAA) was reached under which these assets were transferred to effective government ownership. For the other four shareholders who could only partially meet their obligation in kind, the obligation net of the pledged assets was converted into a four-year debt agreement (MRNIAs), backed by a “personal guarantee”. In 2000, another thirty shareholders concluded pure debt agreements (APUs), which were designed to plug perceived loopholes that had arisen in the earlier agreements.

16. IBRA aimed to maximize recovery from the pledged industrial and property assets by designing a well-timed sales program. Although IBRA had originally planned to manage the assets itself, the agency eventually decided that this was outside its mandate and that the value of the assets would remain highest if the original management teams were left in place.12 To safeguard its interests, IBRA placed representatives on the boards of these companies. The sales program was to be carried out in stages, to avoid competition and potential value reduction from the simultaneous sale of similar assets.

17. Rather than enhancing asset value, however, the decision to leave the pledged assets under the control of the original owners eroded asset value and delayed asset recovery. IBRA representatives were generally ineffective in ensuring sound corporate governance, which left significant scope for asset-stripping. IBRA’s desire to avoid a fire sale of assets may also have undermined asset recovery, as the longer the assets remained under the control of the original owners, the greater the scope for value erosion. This erosion of value was compounded by the slower-than-expected recovery of the Indonesian economy. Finally, in many cases asset sales were delayed by obstruction from the original owners.

18. With regard to bank shareholders’ debt obligations, IBRA did little to enforce the terms during 1999-2001. Although the obligations entailed regular payments of principal and interest, recoveries were essentially zero during this period. While IBRA had powerful enforcement actions at its disposal, the fact that many of the bank shareholders were prominent individuals (with strong political connections) appears to have inhibited IBRA from taking such actions.13 In addition, because of the unusual legal nature of the agreements, having the defaults validated judicially would be very challenging, especially given serious governance problems in the courts.

19. A comprehensive “get tough” enforcement policy was adopted in late 2002 as the maturity of the agreements neared. A deadline of March 2003 was set for shareholders to come into full compliance with their obligations. For those who did not meet the deadline, strong enforcement actions would be taken. The policy also entailed the following:

  • For MSAAs (fully collateralized agreements), a full legal assessment would be undertaken to assess whether (i) all pledged assets had been legally transferred to IBRA, and (ii) there had been any misrepresentation of the transfer value of the pledged asset. Full compliance would require the shareholder to remedy any outstanding irregularities.

  • The same legal assessment would be undertaken for MRNIAs (partially collateralized agreements). The collateralized debt obligations would be offered for sale.

  • APU debtors (with pure debt obligations) were offered a principal reduction of roughly one-third and full interest forgiveness.

20. Though the new policy led to increased compliance, in the end recoveries under the shareholder settlement agreements only reached one-quarter of the original obligations (Table III.4). At the time of IBRA’s closure, 28 shareholders had essentially met their obligations, six others were expected to come into full compliance, and ten remained uncooperative and were in various stages of legal enforcement.14 In addition, one of the original ten noncooperative shareholders had also reached settlement, while the others were still being handled by the legal authorities. Once shareholders have come into full compliance with their obligations, they receive a closing letter from the government stating that they have met all the terms and conditions of their agreement. The recovery rate varied significantly across shareholders: while recovery under the largest agreement was about 37 percent, it was nearly zero for several of the other large debtors (especially those with only partially collateralized agreements).

Table III.4.

Shareholder Settlement Agreements: Obligations and Recoveries, 1999-March 2004

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Sources: IBRA; and Fund staff estimates.

For 1998/99 agreements, recoveries are based on repayment of promissory notes. For 2000 agreements, recoveries include cash payments (Rp 2.5 trillion) and certificates of entitlement (Rp 0.8 trillion).

Five of these agreements (obligations of Rp 0.2 trillion) had previously been settled upfront in cash.

The original obligation of these banks, Rp 18.3 trillion, was reduced in 2002 to Rp 12.3 trillion. Based on the revised obligation, the recovery rate was about 27 percent.

21. With hindsight, earlier efforts to enforce the settlement agreements—by taking full control of the pledged assets, and ensuring timely repayment of the debt obligations—would probably have enhanced asset recovery. Until 2002, IBRA was of the view that taking such a route would compromise asset recoveries, given that enforcement actions were unlikely to succeed. However, this only highlights the underlying reason that recoveries were so poor, namely the lack of political support for enforcing the agreements. Even after the government decided to adopt a get-tough policy, recoveries might have been higher if the handling of the agreements had been turned over to the appropriate legal and police authorities. However, given the serious governance and other institutional weaknesses in these branches of government, implementation of the agreements would likely have remained problematic.

Bank equity and other bank-related assets

22. Recoveries from the sale of IBRA’s banks have been reasonable in relation to their book values. Majority stakes were divested through transparent auction mechanisms (in some cases, auctions were cancelled when bids were below IBRA’s reservation price). In addition, minority stakes have been sold directly into the market, or as blocks to the majority owner. To date, the divestment of IBRA’s banks has raised over Rp 15 trillion, with banks generally sold for above book value (Table III.5). IBRA has also earned about Rp 4 trillion in dividends from its holdings of bank equity. This compares with Rp 9 trillion originally required to bring the banks from zero to positive capital, and subsequent injections of about Rp 9 trillion to address liquidity shortfalls at banks BII and Permata. The strategy for recovery from other bank-related assets—offering them for sale in public auctions—was appropriate for maximizing recovery. Sales began early (April 2000), and returned over 5,500 properties and other assets to private ownership, raising Rp 5.1 trillion.

Table III.5.

IBRA Recoveries from Bank Divestment 1/

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Sources: IBRA; World Bank; and Fund staff estimates.

Excludes February 2004 sale of minority stakes (1–8 percent) in the banks, which raised Rp 1.5 trillion.

Book value as of December before sale, except Niaga (December 2002) and Lippo (September 2003).

July-October 2002 and July-September 2003.

Remaining stakes and total recoveries

23. At the time of IBRA’s closure, assets with a face value of roughly Rp 275 trillion remained in government hands. However, only Rp 108 trillion of these assets were held “free and clear” (including bank equity and NPLs of some of IBRA’s largest debtors), while Rp 166 trillion represented assets in various stages of litigation. A new holding company, with a five-year mandate, was established in March 2004 to restructure and eventually sell the unencumbered assets. Assets in litigation will be handled by a high-level inter-ministerial team (headed by the Minister of Finance). IBRA expects recoveries from all remaining assets to yield about Rp 15 trillion.

24. Through March 2004, recoveries from IBRA assets totaled roughly Rp 150 trillion, nearly one-quarter of the government’s gross outlays during the banking crisis. Recoveries from NPLs accounted for nearly two-thirds of the total (Table III.6). The net cost of the crisis at this stage therefore stands at about Rp 500 trillion, or 40 percent of 2000 GDP. Even including further recoveries from IBRA’s remaining assets, Indonesia’s banking crisis is likely to remain the most costly of all the Asian crisis cases (Table III.7).

Table III.6.

IBRA Recoveries, 1998-March 2004

(In trillions of rupiah)

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Table III.7.

Fiscal Costs of Selected Banking Crises

(In percent of GDP)

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Sources: Hoelscher and Quintyn (2003), p. 41; and Fund staff estimates for Indonesia.

D. Revitalizing the Corporate Sector

25. Given the significant scale of its distressed debt holdings, IBRA was expected to play a prominent role in revitalizing the corporate sector. Prior to the crisis, the corporate sector was marked by relatively high debt ratios and weak liquidity, in line with other regional economies (Table III.8). The crisis pushed much of the corporate sector into insolvency. At the height of the crisis, almost 75 percent of banking system loans became nonperforming (by far the highest ratio in the region). IBRA’s holdings represented over 90 percent of all onshore distressed debt, and IBRA was involved in 40 percent of the (offshore debt) cases mediated by the Jakarta Initiative Task Force (JITF).

Table III.8.

Corporate Sector Indicators, 1996

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Sources: Thompson Worldscope; and Fund staff estimates.

Ratio of current assets to current liabilities.

Ratio of current assets (net of inventories) to current liabilities.

26. However, IBRA’s efforts to support corporate sector recovery through its restructuring of distressed debt were largely ineffective. It was hoped that IBRA’s extrajudicial powers would give it more leverage than private creditors to achieve substantive corporate restructuring. However, debt restructuring was very slow: by June 2000, only 23 percent (by face value) of the largest loans had finalized restructuring plans, and only 2 percent had begun implementing restructuring agreements. Moreover, IBRA was subject to considerable political interference, and in some cases restructuring agreements appeared to focus on meeting employment or national interest concerns, rather than placing the firm on a commercially viable footing. In any event, as discussed above, by early 2002, IBRA had shifted its focus from concluding restructuring agreements to selling unrestructured loans.

27. In addition, IBRA’s restructuring activities were not fully coordinated with those of other government agencies. In particular, in the immediate post-crisis years, IBRA often worked at cross-purposes to the JITF. While the agencies were supposed to coordinate their corporate debt policies, in a number of cases IBRA reached bilateral agreements with debtors. These agreements were often motivated by IBRA’s revenue collection concerns, rather than broader corporate restructuring goals.15 This served to undermine the JITF’s ability to facilitate transparent global debt resolutions. Coordination was improved in early 2000, when it was decided that the terms of all major restructurings would be overseen by a high level ministerial committee. Following this and other reforms to the JITF framework, the pace of restructurings accelerated (Figure III.1).

Figure III.1.
Figure III.1.

Debt Restructurings Mediated by JITF

(cumulative)

Citation: IMF Staff Country Reports 2004, 189; 10.5089/9781451818314.002.A003

28. Over time, the corporate sector began to revive as the pace of market restructurings advanced. The corporate sector remained relatively frozen in the initial aftermath of the crisis, with very little improvement in financial indicators. Most companies ceased servicing their debts, and creditors realized that deficiencies in the legal system limited their ability to press their claims. As debtors and creditors adjusted to the situation, restructuring activity through the JITF increased. This was supported by parallel developments in the secondary debt markets (it is widely believed that debtors were able to buy back their debts on the secondary market). IBRA’s decision to proceed with large-scale asset sales in 2002 also promoted private-sector restructurings, as buyers of distressed assets would work out arrangements with the debtors. Indicators of corporate sector health have improved in recent years (Figure III.2). While this reflects a number of factors, including a strengthened macroeconomic environment, it may also reflect increased market-based restructuring following IBRA’s sale of unrestructured assets.

Figure III.2.
Figure III.2.

Corporate Sector Indicators

Citation: IMF Staff Country Reports 2004, 189; 10.5089/9781451818314.002.A003

1/ Ratio of current assets net of inventories to current liabilities.Source: Worldscope

E. Conclusion

29. Overall, IBRA was successful in achieving its key objectives. It performed particularly well in stabilizing the banking system, by rapidly restoring the public’s confidence, efficiently closing over 50 banks, and merging, recapitalizing, and then returning to private ownership banks accounting for about 25 percent of the banking system. IBRA performed less well in maximizing asset recoveries, as the slow pace of asset sales probably compromised returns. Finally, IBRA’s role in supporting corporate sector recovery was mixed, with initial emphasis on restructuring loan assets proving largely ineffective and delaying real sector recovery.

30. The absence of an effective legal and judicial framework compromised asset recoveries. Despite the introduction of a new bankruptcy law and other relevant reforms after the crisis, the legal and judicial framework remained weak.16 In the case of loan assets, this undermined IBRA’s position in debt restructuring negotiations, and also reduced the market value of its NPLs. The impact on recoveries under the shareholder settlement agreements was also significant, as few effective steps were taken by the relevant authorities to enforce the agreements. Although the creators of IBRA had anticipated such problems, and therefore vested the agency with extrajudicial powers to facilitate asset recovery, the agency only availed itself of these powers on a few occasions, as its enforcement efforts were stymied by judicial opposition.

31. However, the most important constraint on IBRA’s effectiveness was the absence of clear political support. During the first few years of its existence, IBRA’s operations were hamstrung by conflicting views within government regarding how best to maximize asset recovery, and a reluctance to sell assets at discounts to their principal or assessed values. Beginning in 2001, government support for IBRA’s asset recovery efforts increased, and asset sales accelerated as a result. However, the continued absence of strong political backing for the enforcement of the shareholder settlement agreements is likely to have undermined recoveries from these obligations.

Annex III.I

Timeline of Key IBRA Activities

1998–99

  • Overall: IBRA established in January 1998; assets transferred to agency.

  • Bank restructuring (BRU): Initial rounds of bank take-overs, mergers, and closures.

  • NPLs ( AMC): Transfer of NPLs to IBRA; sale of credit card debt portfolio (May 1999).

  • Bank shareholder settlement (AMI): Settlement agreements signed with nine bank shareholders; establishment of holding companies to manage pledged assets.

2000–01

  • Overall: Oversight Committee established to monitor IBRA’s performance.

  • BRU: Eight taken-over banks merged into Bank Danamon (September 2000); first

    (minority) divestment of an IBRA bank (BCA, May 2000).

  • AMC: Sale of restructured corporate loans initiated (June 2000); adoption of Corporate Debt Restructuring Principles to ensure good governance (April 2001).

  • AMI: Settlement agreements (APU) signed with 30 bank shareholders (2000); sale of pledged assets initiated (March 2000).

2002

  • Overall: Asset recovery accelerates.

  • BRU: Majority divestment of banks BCA (March) and Niaga (November); merger of five IBRA banks into Bank Permata (December).

  • AMC: Sale of unrestructured corporate loans initiated; NPL disposal accelerates dramatically while restructuring efforts are scaled back.

  • AMI: Adoption of strengthened enforcement policy for settlement agreements.

2003

  • Overall: Efforts geared towards completion of asset disposal ahead of closure.

  • BRU: Majority divestment of banks Danamon (May) and BII (November).

  • AMC: All remaining NPLs offered for sale; some of IBRA’s largest corporate loans (including Texmaco) remain unsold.

  • AMI: Enhanced recoveries under new policy, though payment deadlines repeatedly slip.

2004

  • Overall: IBRA closed at end-February. Unsold assets with clear legal title transferred to new government-owned asset-management company; unsold assets in litigation handled by high-level team.

Table A.1.

Indonesia: Timeline of IBRA’s Majority Bank Holdings 1/

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Includes banks taken over and banks jointly recapitalized with the participation of private owners.

Excludes Bank Bali and BII, which were subsequently taken over.

1

Prepared by Andrea Richter Hume and Alexander Wolfson.

2

Chapters II and III of IMF Country Report 00/132 and Chapter III of IMF Country Report 02/154 provide a fuller description of IBRA’s responsibilities and institutional structure.

3

See Annex III.I for a timeline of key events at IBRA.

4

IBRA, “Strategic Plan, 1999–2004”, mimeo (October 1999), p. v.

5

As part of this operation, one state bank was taken over (representing 8 percent of banking system liabilities). This bank was later merged into the new state-owned bank Mandiri.

6

Strategic stakes in IBRA banks were sold through public auctions. Short-listed bidders were vetted by Bank Indonesia to ensure they satisfied fit-and-proper requirements.

7

For owners of heavily indebted companies, reaching a restructuring agreement could precipitate an effective loss of control, as those purchasing the restructured loans were likely to convert the debt into equity, or take other steps to assert effective ownership control.

8

In the case of Texmaco, these terms included long repayment maturities, low interest rates, and leaving the debtor companies under full operational and financial control of the debtor. In addition to being IBRA’s largest corporate debtor ($3 billion principal), Texmaco is also considered one of the most recalcitrant ones; its debt has yet to be resolved.

9

The Oversight Committee was established in July 2000 to monitor IBRA’s performance, in particular its compliance with principles of sound corporate governance and transparency.

10

Debt restructuring operations generally resulted in a “sustainable” portion of debt (which could be serviced given the company’s business prospects) and an “unsustainable” portion, which was converted into equity or quasi-equity (convertible bonds).

11

In some cases, particularly for firms where employment or other sociopolitical concerns were relevant, IBRA floor prices were considerably above the true market value.

12

Most pledged assets were transferred to IBRA-owned holding companies.

13

Under Indonesian law, nonpayment of a debt owed to the state could be punished with civil detention. In addition, IBRA’s extrajudicial powers would have allowed it to seize shareholder assets to meet the outstanding obligation.

14

Depending on whether the underlying violation is civil (e.g., corruption) or criminal (e.g., violation of banking law or embezzlement), the cases will be handled by the Attorney General’s office or the police, respectively.

15

“JITF Final Report” (December 2003), pp. 26-32.

16

Chapter IV presents an assessment of recent legal and judicial reforms in Indonesia.