Analysts praise bank bonds issue<\/p>\n
JAKARTA (JP): Analysts welcomed on Saturday the government's
\nmove to issue bonds worth Rp 103.83 trillion (US$12.82 billion)
\nto recapitalize 23 ailing banks as a positive step.<\/p>\n
But they cautioned that the challenging task of resolving the
\nmassive amount of problem loans and nonperforming loans (NPLs) in
\nthe banking industry still lay ahead.<\/p>\n
\"This is positive because it's a step which we've been waiting
\nfor after being delayed for some time,\" Ferry Y. Hartoyo, head of
\nresearch at securities firm PT Vickers Ballas Tamara, told The
\nJakarta Post.<\/p>\n
I Nyoman Moena, a senior banker and former Bank Indonesia
\ndirector, also welcomed the step, saying it was part of the
\noverall economic reform needed to rebuild the shattered economy.<\/p>\n
The two, however, warned that settling the NPLs of the banking
\nsector was much more crucial in rebuilding the battered industry.<\/p>\n
Finance minister Bambang Subianto issued on Friday floating-
\nrate bonds worth Rp 95.15 trillion, and fixed-rate bonds worth Rp
\n8.68 trillion to recapitalize 11 private banks and 12 provincial
\ndevelopment banks.<\/p>\n
Bambang also announced the issue of Rp 53.78 trillion index-
\nlinked bonds to repay Bank Indonesia loans, provided under the
\ngovernment deposit guarantee scheme, to depositors and creditors
\nof the 48 banks closed in 1998 and 1999.<\/p>\n
The government recapitalization program is designed to raise a
\nbank's capital adequacy ratio (CAR) to the minimum 4 percent
\nlevel for private banks, and to 8 percent for provincial
\ndevelopment banks.<\/p>\n
CAR is the ratio between capital and risk-weighted assets.<\/p>\n
Indonesian banks' capital has severely deteriorated due to
\nhuge piles of NPLs and a negative interest rate spread resulting
\nfrom higher interest rates offered for time deposits compared to
\ninterest charged on loans.<\/p>\n
But Ferry said the banks would continue to suffer if the huge
\nproblem loans in the industry were not restructured.<\/p>\n
\"So the restructuring of the real sector is the key to a
\ncomplete turnaround in the banking industry,\" he said.<\/p>\n
The injected capital from the recapitalization program is to
\nreplace the NPLs transferred from the recapitalized banks into
\nthe Indonesian Bank Restructuring Agency (IBRA).<\/p>\n
Moena said that resolving the huge amount of NPLs was
\nparticularly crucial to helping finance the huge cost of
\nrecapitalization.<\/p>\n
The government has been under fire over the huge cost of the
\nrecapitalization program. The cost is much larger than initially
\nestimated, particularly for private banks due to the persisting
\nnegative spread problem.<\/p>\n
Moena said the huge cost of the recapitalization program would
\nbe a strain on the state budget.<\/p>\n
Some analysts speculate that the government will have to drop
\nvarious subsidy programs to pay for the greater recapitalization
\ncost.<\/p>\n
The government has allocated some Rp 34 trillion in the
\n1999\/2000 fiscal year to finance the interest rate cost of the
\nbonds issue.<\/p>\n
The floating-rate bonds carry a market interest rate linked to
\nthe interest rate of three-month Bank Indonesia promissory notes
\n(SBIs); fixed-rate bonds have a coupon rate of 12 percent and 14
\npercent depending on their maturities; and index-linked bonds
\nhave a coupon rate of 3 percent plus inflation.<\/p>\n
Bambang said a restructuring program for the real sector would
\nhelp resolve the problem of banks' nonperforming loans and would
\nimprove the banks' performance and provide revenue for repaying
\nthe government bonds.<\/p>\n
\"We want to improve the market value of the banks by improving
\ntheir loan portfolio to allow the government to divest its
\ninterest in the banks (at profit),\" Bambang said.<\/p>\n
He also said the restructuring of NPLs by IBRA was expected to
\nprovide the government with additional income.<\/p>\n
Bambang also said confiscated fixed assets of closed down
\nbanks and their loan portfolios would be the source for financing
\nthe index-linked bonds.<\/p>\n
\"So the restructuring program of the real sector is key to
\nfinancing the bond issue,\" Bambang said.<\/p>\n
But restructuring the real sector seems to be easier said than
\ndone, particularly as many of the businesses are in a dire
\nstraits due to the economic crisis.<\/p>\n
Ferry said the recapitalization cost for the first 23 banks
\nwas not much, pointing out that it would cost much more to
\nrecapitalize the country's seven state banks in the future. It is
\ncurrently estimated at Rp 244.8 trillion.<\/p>\n
He also said the financial burden of recapitalization was
\nexpected to lessen as the interest rate of three-month SBI notes
\nwas declining.<\/p>\n
He added that a longer maturity of the bonds would also lessen
\nthe fiscal strain.<\/p>\n
\"Most of the bonds are floating-rate instruments with coupon
\nrates linked to three-month SBIs. And we're expecting an interest
\nrate of around 20 percent by the end of the year,\" Ferry
\nsaid. (rei)<\/p>",
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