Indonesia's new president faces $186 trillion debt dilemma

Days After taking over as head of Southeast Asia's largest economy, Indonesia's president needs a plan to deal with rising borrowing costs at major state-owned companies that carry $186 billion in debt dollars.

Former general Prabowo Subianto must repair the balance sheets of companies, including the national carrier and the largest steelmaker, after his predecessor spent $800 billion on an infrastructure project that pushed many state builders to record debt levels. The challenge is all the greater as the government grapples with a decades-old question: how involved it should be in an economy where it still operates hotels and pharmacies.

We need to focus on fundamental issues, Burhanuddin Abdullah, a former central bank governor and adviser to Prabowos' campaign team, said last month, referring to the fiscal capacity the new government has. It estimates that only 1.1 trillion rupiah (S$92.6 billion) remains in government coffers after debt servicing and required fund transfers to regional governments. It's not much. There's not much the president can do with that.

This could prompt Prabowo's government to continue relying on state-owned enterprises to execute priority programs, a tactic similar to that used by his predecessor. State-owned builders Waskita Karya and Wijaya Karya collectively accumulated liabilities of more than $9 billion under former President Joko Widodo and have had to restructure their unsustainable amount of debt since 2023. At least two other large state-owned enterprises (SOEs) have also reorganized their debt in recent years, while state pharmaceutical company Indofarma has been in trouble this year and has not paid its employees' salaries due to fraud allegations.

As a result, other state-owned enterprises are paying the price for growing investor concerns. State builder PP had to pay 211 basis points more in public debt spreads for a rupee bond sale this year compared to its issuance two years ago. This is despite spreads on other companies' bonds of similar tenor and rating tightening by around 51 basis points over the same period. Similarly, builder Adhi Karya paid 220 basis points more in spreads for a bond sale compared to its 2022 issuance, while spreads for similar bonds remained largely unchanged.

At least two local fund managers who spoke with Bloomberg News and who invested in the local currency bonds of construction companies that restructured their debt have since shunned other state-owned builders, even those that never restructured or have never defaulted on their debt, they said.

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The proportion of rupee-denominated bonds issued by state-owned companies has fallen to just 25 percent of total local currency issuance in the country so far this year, according to data compiled by Bloomberg. When former President Jokowi began his second term in 2019, state-owned enterprises accounted for more than half of the local primary market.

Deteriorating confidence in state-owned enterprises will strain their ability to find funds from public markets and investors, increasing their reliance on state-owned enterprise banks, said Alessandro Gazzini, Indonesia director of the advisor in corporate restructuring Alvarez & Marsal.

This comes as the new president aims for an economic growth target of 8%, an ambitious goal that depends on help from state-owned enterprises. The government needs state-owned companies to continue building more roads connecting the island and to implement a plan to build a new capital.

The government's reliance on state-owned enterprises to help implement strategic programs such as infrastructure will grow, according to John Teja, chairman and director of local brokerage Ciptadana Sekuritas Asia. It is essential that the government improves the balance sheets of these companies and the quickest way to do this would be to inject additional capital.

Although Prabowos' cabinet has not made any comments on the debt issue since taking office last week, the Ministry of Public Enterprises is working on a plan that the new administration could implement to restore confidence in its businesses . The plan, part of the ministry's restructuring work since 2023, includes options such as providing additional capital to some of these companies, merging the struggling companies into a healthier parent company and forcing them to specialize their work instead of competing with each other and causing losses. a price war, according to a person close to the project. Discussions are ongoing and the plan is not final, the person added.

Representatives for Waskita Karya, Wijaya Karya and Indonesia's Ministry of Public Enterprises did not respond to requests for comment from Bloomberg News.

In response to questions, State Builder PPs Chief Financial Officer Agus Purbianto said the company's wider spreads on its latest bond offering were due to weak investor demand, partly due to a lack trusted in the construction sector. He said the company would try to boost investor confidence by improving its finances, selling some assets and partnering with strategic investors to reduce the company's debt load.

Adhi Karyas secretary general Rozi Sparta said negative investor sentiment towards state-owned construction companies has affected the company's access to the bond market, forcing it to offer wider spreads.

Failure to resolve the debt problem of public enterprises in a timely manner also risks harming the country's private sector. Financing restrictions on state-owned enterprises will cause them to become dependent on state-owned banks, which could crowd out access to financing for private companies and indirectly dampen the appetite of global investors to enter Indonesia, according to A&Ms Gazzini.

The long-term implication on Indonesia's economic development model is substantial, Gazzini said. Essentially, the most unproductive companies increase their presence in the economy. This will have a negative impact on the actual creation of new jobs and value-added economic development. BLOOMBERG