The decision by the Commercial Court of Central Jakarta in Indonesia to declare PT Prudential Life Assurance bankrupt is "silly" according to Boediono, Indonesia's Minister of Finance. Speaking in an interview with Financeasia.com, Boediono said the main problem was to do with the law itself, rather than the specific case. Under Indonesian law, the court has the power to declare an insurance company bankrupt if it has one outstanding debt that has not been paid, regardless of the overall solvency of the company.
"I know it is a silly problem, to have a good company, which is announced to be bankrupt. But the law is there," he says. "So we need to change the law and we are now in the process [of doing this]."
Boediono says his ministry has an amendment to the bankruptcy and insurance laws to parliament, which would give the Ministry of Finance the sole right to declare an insurance company bankrupt. This is how it works with the banking sector. However that amendment is one of 60 bills his ministry has submitted to parliament and are currently being held up by Indonesia's five-month election process.
Nevertheless, Boediono says there is a general agreement the law needs to be changed and the wheels are in motion to achieve this. "The substance is there and I don't see too much disputation. It is a matter of when we can get the time slot to discuss it," he says.
But, he admits, "we might need to be patient and wait for the next government."
While that news might be soothing for foreign investors looking at the general investment scenario in Indonesia, it will be scant relief for Prudential, which has to deal with this latest case of legal madness to come out of Indonesia.
The court decision came on Friday when it was decided that Prudential owed some US$400,000 equivalent to a former sales agent, Lee Boon Siong, whom the company sacked in January 2004. Lee claimed for $42.5 million equivalent in unpaid bonuses, travel allowances and lost potential earnings.
The case closely resembles that of the infamous Manulife situation of 2002 in which the Canadian insurance giant was declared bankrupt after a dispute with a renegade shareholder.
Prudential, a unit of Prudential Plc of the UK, was quick to condemn the decision. In a statement issued from its UK headquarters, the company noted it "considers, on the basis of its legal advice, that the bankruptcy petition is misconceived... PT Prudential Life Assurance is very surprised that the Court has decided to accept the petition filed against it. PT Prudential Life Assurance plans to vigorously appeal the Jakarta Bankruptcy Court's decision."
The statement goes on to say that PT Prudential Life Assurance has "Risk Based Capital (RBC) ratio of 255% (as at December 31, 2003) [which] compares very favourably with the 100% requirement dictated by the Ministry of Finance."
One of the more ironic aspects of the case is that the Indonesian insurance sector is probably a good investment for foreign companies based on the low penetration of insurance products sold in the country and the lack of large domestic competition. That irony is not lost on Boediono.
"The insurance sector is potentially the most profitable for foreign investment," he comments. "Domestically our capacity to meet the demand for insurance is limited so I think it's an area that is profitable. Yet these unfortunate cases mean investors will ask for a premium to cover this risk of uncertainty. So what we need to do now is remove this uncertainty."
The frustration for Boediono is obvious. His team of technocrats have done as much as possible to return Indonesia's finances to something like normality after the crises of 1998-2000.
Government debt to GDP levels are down to below 2%. Tax revenues are up to $30 billion a year equivalent.
Economic growth is up to 3.5% to 4%. The country also just re-entered the international bond markets with a very successful $1 billion deal.
But the missing ingredient to Indonesia economic rebound is foreign investment. And despite all the good steady work that Boediono and his team do, situations like the Prudential case can unravel that goodwill in a trice, dissuading foreign investors from buying into the rebound story.
For the full transcript of the interview with Boediono read Borrower of the Week in our Capital Markets Newsletter, coming out this afternoon (Friday April 30th).