The End for Indonesia's Bakrie?

Aburizal Bakrie, the billionaire politician who simultaneously heads the Bakrie conglomerate empire and the Golkar political party, and who has dodged a long string of financial disasters, appears to have just about run out his string unless he can pull a government bailout one more time.

This time around, it doesn’t seem likely that will happen, nor are multinational investors who have been burned time after time – the latest Nat Rothschild – likely to help him out. That may well bode major changes in Indonesia’s political structure as well, given that Bakrie, despite denials, remained the biggest money man behind Golkar, funding political campaigns and party operations.

At that, the parent is a relative shadow of what it was prior to 2007. With multinational creditors baying at his heels, Bakrie was forced to divest a major part of its ownership of several companies before buying back into them later. A spokesman told local reporters the parent company ownership in listed companies under the Bakrie Group name now ranges between 10 percent and 30 percent.

That isn’t to say it won’t happen. Bakrie has repeatedly dodged financial bullets and the attempts to hold him to account by outraged minority shareholders, often turning to the government for help, either through bailouts or by obtaining lucrative contracts. But it doesn’t appear that either he or Golkar have the clout to do it again in modern Indonesia. Bakrie’s PT Bumi Resources, having been listed in London instead of the much more forgiving Jakarta Stock Exchange, is now being probed in the UK for potential financial and other irregularities.

Ari Hudaya, the chief executive officer of the London-listed coal venture, abruptly quit the board after the investigation was announced. Authorities are examining asset write-downs for exploration equipment and development funds in particular, with Moody’s now having cut its outlook on senior secured debt to negative from the prior stable classification, with particular concern focused on the company’s ability to refinance loans of over $300 million in 2013.

Along with that, global coal prices have continued to descend as the economic slowdown has cut demand in the world’s biggest coal importing countries, China, Japan, South Korea and India. With the Bakrie companies leveraged to the limit, falling prices have had a negative effect on the conglomerate’s fortunes.

Bumi Resources, the country's biggest thermal coal producer, was forced to deny reports by Indosurya Asset Management in Jakarta that the company was on the brink of collapse. In addition, Fajar Indra, a metals and mining analyst for the Jakarta-based Panin Bank’s equities arm, wrote that “It can be concluded that Bumi is in the danger zone. Bumi’s financial report also shows how bad Bumi’s solvency is in paying its debts.” The research note predicted that Bumi would face bankruptcy within two years. Ever since, Bumi Resources’ share price has continued to tank. PT Bumi’s share price is down more than 60 percent, Bumi Plc is down more than 70 percent.

The situation hasn’t been helped by rumors that the 55-year-old Bakrie had suffered a stroke earlier this month. The rumor has been denied by a company spokesman.

Certainly the financial troubles and the stroke rumors are having a negative effect on what was already thought to be a long-shot presidential candidacy. Bakrie was the first of Indonesia’s major politicians to throw his hat into the ring for the 2014 presidential election. But he has run into problems beyond just the financial and health difficulties. Alex Noerdin, the South Sumatra governor and Bakrie’s surrogate candidate in the Jakarta governor’s race was trounced in the primary, forcing Bakrie, the head of Golkar, to switch to make common cause with the Democratic Party, headed by President Susilo Bambang Yudhoyono, to back the incumbent Fauzi Bowo. Fauzi lost decisively to Joko Widodo, the reform candidate backed by the Indonesian Democratic Party of Struggle, or PDI-P, and Gerindra, which is headed by the other putative presidential candidate, Probowo Subianto.

Whether Bakrie could be a viable candidate even without his financial problems is questionable. He was so unpopular after the then-Bakrie owned company Lapindo Brantas gas blowout in Sidoarjo, East Java that Tempo Magazine printed a picture of him with the numbers 666 – the mark of the devil – imprinted on his forehead. The foul-smelling mud has swamped at least 12 villages since 2006 and is predicted to go on erupting for anywhere from 20 to 80 years, displacing about 50,000 people for far.

Political analysts in Jakarta say the Bakrie empire’s financial problems are destined to have a knock-on effect on Golkar, the political party founded by the late strongman Suharto. Once the strongest party in the country, Golkar has run into increasing headwinds. Its 2009 presidential candidate, Jusuf Kalla, lost decisively to Yudhoyono and the party was largely supplanted in voter affections by the president’s Democratic Party until the Democrats themselves basically self-destructed with a series of scandals in 2011 that are still being played out in investigations by the Corruption Eradication Commission.

The travails of minority shareholders

What Bakrie has done to minority shareholders over the last couple of decades is the stuff of legend. The Bakrie family empire has nearly capsized twice since the 1997-1998 Asian Financial Crisis, the first time bobbing back to the surface only because a thoroughly corrupt Indonesian government bailed Bakrie out.

The second time, amid allegations of massive share manipulation, Bakrie shares fell by 30 percent and resulted in the closure for three days of the Indonesian Stock Exchange at the onset of the global credit crisis. That later resulted in a months-long campaign by furious multinational bankers and shareholders to get their money back after the then-Finance Minister Sri Mulyani Indrawati blocked another round of bailouts.

For her stubbornness, and her zeal in pursuing tax evasion charges against Bakrie companies, Sri Mulyani was banished after Bakrie led a campaign to get rid of her, quitting the government to join the World Bank as a managing director, She charged in an interview with the Wall Street Journal that Bakrie had been behind the manufacture of a scandal over the US$710 million bailout of Bank Century in 2008, which at the time seemed poised to drag the country's banking sector into the muck of the global crisis. The plan was to ensnare her and Boediono, the respected former Bank Indonesia head who became Yudhoyono's vice president.

Attempts to conveniently sweep the London investigation under the rug by claiming differing accounting standards across different countries are likely to prove difficult to finesse.

“We suggest watching this situation closely, as it shines a light on the intersection between commodity prices and corporate debt in a region where we have grown accustomed to thinking of relatively clean private sector balance sheets,” said independent financial analyst Jim Walker of the Hong Kong-based Asianomics.