Can Indonesia's Salim Get Out Of This Corner?
When foreign bankers begin the painstaking process of restructuring the crushing $80 billion in debts of Indonesian corporations, across the bargaining table will be a familiar face: Anthony Salim, chief executive of Indonesia's biggest conglomerate. Salim eagerly agreed to become point man for the debt talks when asked by Indonesian President Suharto. "It's as if you're sitting on the Titanic," Salim explained in a rare interview. "If Indonesia sinks, all the corporations will sink."
Salim has reason to be anxious. His sprawling Salim Group is in deep financial trouble after years of heavy borrowing and breakneck expansion. It also epitomizes the style of crony capitalism that is coming under fire for getting Indonesia into such treacherous waters. For the past three decades, the group has milked one key asset--the close relationship between Salim's billionaire father, known by his Chinese name of Liem Sioe Liong, and Suharto. That allowed Liem to build an empire spanning banking, food, cement, and autos. Liem, now 82, extended his domain through numerous financial links with Suharto's network of family businesses.
WORTHLESS STOCK. But now, Indonesia's crisis is reaching deep into Suharto's charmed circle. The 75% plunge in the rupiah and the crash of the Jakarta stock market since last June came just as Salim was aggressively expanding. Shares in the group's five Jakarta-listed divisions, which had a market capitalization of $5.3 billion last September, are now virtually worthless. Analysts believe Salim's two flagships--Indocement and Indofood--are technically insolvent after devastating foreign-exchange losses on their $1.4 billion in unhedged foreign borrowings.
The group's high profile also is becoming a liability as public anger mounts against Suharto and superrich tycoons. Indofood, for example, dominates Indonesia's market for instant noodles, second after rice as a staple. It has doubled prices to cover the rising cost of imported flour and packaging materials, helping fuel riots over soaring food prices. What's more, terms of the $43 billion International Monetary Fund bailout require that Indofood's lucrative monopoly to mill wheat be abolished. Yet it remains, even though the deadline for ending it has passed.
Instead of selling assets to pay his debts, Salim seems to be pinning his hopes on persuading lenders to roll over their loans. That explains his interest in heading a committee representing Indonesian debtors to work with foreign banks and Indonesian government officials to restructure the foreign debts of up to 800 private companies. The panel recently held its first meeting to devise guidelines. "Corporate debt is the root of [Indonesia's] problem," he says.
As he waits for relief, the crisis is forcing Salim to rein in his ambitions. His Hong Kong-listed First Pacific Group has had to sell a lucrative Hong Kong telecom franchise. Hopes of acquiring control of Philippines beverage giant San Miguel Corp. are on ice, as are plans to join with Credit Suisse First Boston to take over Jakarta's ailing Bank Danamon through a rights issue. Salim's attempt to shift his father's controlling stake in Indofood into Singapore-listed QAF, a bread company he also owns, fizzled when Indofood's stock crashed. At the time, critics interpreted the deal as capital flight. But Salim also had hoped to use QAF to market consumer goods across Asia in a partnership with Indonesian cigarette tycoon Putera Sampoerna.
Things are worsening at Salim's core Indonesia businesses, too. Activity at Indocement has ground to a near-halt because of the property collapse. The 70% plunge in new-car sales and the spiraling costs of imported components forced its Indomobil unit to close its Mazda and Suzuki car-assembly lines.
TANGLED WEB. Granted, the First Family ties mean Suharto still helps the group when he can. Suharto's half-brother, Sudwikatmono, is a key shareholder in Salim Group. The conglomerate's Bank Central Asia is 30% owned by Suharto's eldest son Sigit Harjoyudanto and eldest daughter Siti Hardiyanti Rukmana and has financed many family investments. Such ties may be one reason Indofood still has its flour-milling monopoly. Salim claims the IMF's real aim is to get the government to disclose how much it pays Indofood to mill flour, which it will do. But the Jan. 15 pact between the IMF and Jakarta states the monopoly will end Feb. 1.
In hindsight, the Salim family's trust in their connections may have blinded them to the problems that led to the meltdown. "They thought they were so close to the government that they would know everything first," says Goei Siauw Hong, head of research at SocGen-Crosby Indonesia. "The problem was that the government did not know what would happen." It also came as a shock that diversification across Asia would not buffer the group from a local slump. "We thought that if one country goes down, then another should sustain or go up," says Salim.
With Suharto's power still solid, Salim has time to reflect on his options. But he'll eventually have to sell some of his family's best assets--unless he can persuade foreign creditors to keep Indonesia's leaky ship afloat.