Pacific Money | Economy | Southeast Asia
The state-owned construction firm has crumbled under a heavy load of bond obligations, but the risk of economic contagion is low.
As reported by Bloomberg, Indonesian state-owned construction firm Waskita Karya will be unable to meet IDR 135.5 billion (about $9 million) in bond obligations that came due on August 6. It was also reported that Bank Mandiri (which is itself majority state-owned) would no longer be approving loans to employees of Waskita Karya or its subsidiaries. This is unusual in Indonesia, where working for a state-owned enterprise is usually considered a sign of creditworthiness.
Erick Thohir, the minister of state-owned enterprises, recently suggested that Waskita Karya will no longer receive injections of state capital to keep its operations going, but that the firm may receive funds tied to specific projects. The company is obviously struggling to continue as a going concern and the government does not want to be seen throwing good money after bad.
This is not a surprise. Bloomberg has been covering Waskita’s ballooning debt for some time. I also wrote about it last year. The cause of the firm’s financial woes is pretty obvious. From its second quarter financial statement (which is unaudited and may be revised) as of June 30, 2023 Waskita Karya had IDR 46.1 trillion (about $3 billion) in long-term bank debt.
Meanwhile, it had the equivalent of $111 million unrestricted cash on hand and was looking at an after-tax loss of IDR 2.2 trillion ($143.6 million). A big chunk of that comes from $130 million in interest payments, equal to 38 percent of total revenue. And that is only through the first six months of the year.
Waskita Karya is what we might call asset rich but cash poor. In addition to its construction activities, the company has rights to toll road concessions with a book value of IDR 48.7 trillion (around $3.2 billion). But these aren’t generating much revenue yet, and in the meantime servicing the bank debt as well as meeting bond obligations as they come due is draining all of its cash.
The danger is that if a major company with a lot of bad debt goes down, it can spill over into counterparties and ignite a wider systemic contagion. The case of Lehman Brothers and AIG in 2008 is a classic example of how this domino effect can paralyze a financial system. But as I have been writing for some time, I think that is unlikely to happen here.
The Indonesian economy, and its financial system including domestic capital markets, are deeper and more resilient than they were in the past. This isn’t the 1970s, when a load of bad debt at a single major state-owned company like Pertamina could threaten a national balance of payments crisis. And it’s also not the 1990s, when the banking sector was weaker and looser regulatory oversight meant bad debt was more pervasive.
Indonesia’s financial system and regulators are better equipped now to deal with companies that can’t pay their debts. State-owned companies like Garuda and Krakatau Steel have gone through orderly debt restructurings that didn’t spillover into the rest of the economy. Sixty percent of Waskita Karya’s bank debt is held by state-owned banks, and Indonesia’s state-owned banks are posting very high profits right now and have solid balance sheets.
Exposure to the bad debt of this state-owned construction firm will not make lenders happy, but it’s unlikely to be their undoing. Moreover, Waskita still has valuable assets on its books like the toll road concessions, and these can be used in negotiations. That doesn’t mean there’s no risk involved as the firm enters court-supervised debt restructuring, but Waskita is not completely worthless and in my estimation the risk is manageable.
The bigger issue this case poses is not so much economic or financial, but political. How did Waskita Karya end up in this position in the first place? Waskita and its management have been the targets of numerous investigations into corrupt practices, like billing for fictitious projects. So why wasn’t the government keeping a closer eye on the firm before all of this came to the boiling point? I don’t know the answers to these questions, but now would probably be a good time for the powers that be to try and find out what they are.