Indonesia’s New Worry Is Its Debt-Saddled State-Owned Businesses

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The coronavirus crisis is creating a new threat for Indonesia’s debt-laden state-owned businesses.

Many had binged on debt for years, faced accusations of mismanagement and even corruption, and were running into repayment problems before the virus struck. Now a slump in revenues and a credit crunch triggered by the dollar’s surge mean those risks will get a whole lot worse.

“Covid-19 is exacerbating some of the challenges of the state-owned sector,” said Xavier Jean, an analyst at S&P Global Ratings in Singapore. State-owned enterprises are facing “a sharp decline in traffic volumes, reduced prospects for growth in electricity consumption at a time of added capacity, and in general more difficult trading conditions.”

Indonesia’s state-owned sector is one of the most pervasive in the world, according to the Organization for Economic Cooperation and Development. The 114 state-owned firms and their hundreds of subsidiaries employ millions of Indonesians and are crucial to building new ports, railways and thousands of miles of roads as part of President Joko Widodo’s $415 billion infrastructure plan.

At the same time, as of the third quarter of last year state-owned firms had amassed combined debt of 1,600 trillion rupiah ($98 billion), according to data from the State Owned Enterprise Ministry. That had grown 15% over the preceding year, putting some companies at risk as economic conditions worsen.

Debt Defaults

Even before the virus outbreak, some SOEs were running into problems. Krakatau Steel, Indonesia’s largest steelmaker, said in January it would restructure $2 billion of debt as it teetered on the brink of bankruptcy. Two state insurers, PT Jiwasraya and PT Asabri, defaulted. The full extent of Jiwasraya’s problems were revealed last month, with authorities putting total state losses at more than 16 trillion rupiah.

Two of the SOEs that are key to building infrastructure have boosted borrowing in recent years. PT Waskita Karya, which builds roads, bridges, harbors, airports and buildings -- including Bank Indonesia’s Jakarta headquarters -- saw its debt soar more than 10 times to 82.8 trillion rupiah as of September, from 7.7 trillion rupiah in 2015. Debt at PT Wijaya Karya, which builds commercial and residential apartments as well as rail transport systems and bridges, jumped to 21.7 trillion rupiah from 3.5 trillion rupiah in the same period.

Jokowi has been trying to clean up the state-owned companies since winning a second term in office last year and appointed Erik Thohir, former owner of Italy’s Inter Milan soccer team, as SOE minister. Thohir has pledged to liquidate firms that fail to show they’re contributing to the country’s economic performance and welfare.

SOEs have been racking up foreign debt as well, boosting their funding costs as the dollar surges. Those risks are reflected in financial markets, for example in the bonds of PT Garuda Indonesia, the airliner facing a slump amid travel curbs. Its $500 million notes due June 3 have tumbled to 47.77 cents on the dollar from 98.72 cents at the end of January, according to Bloomberg-compiled prices.

Edward Gustely, managing director of Penida Capital Advisors Ltd. in Jakarta, said the government must jettison the worst-performing companies -- non-strategic and non-profitable ones -- while others should be candidates for privatization.

Thohir is trying to fix the industry “and certainly has the required leadership skills and capacity to do so,” Gustely said. “But he’s going to need outside help to restructure SOE debt and hire professional talent that can deliver without worry, and can be protected from political interference.”

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