A Rp 300t question
While it is clear that the cost of restructuring the banking sector will exceed Rp 300 trillion, most of us are still in the dark as to how the government intends to finance this massive bail out program. Regardless of where the money comes from, it is the taxpayer who will ultimately be called on to pick up the bill. For those not accustomed to dealing in such orders of magnitude, a trillion has 12 zeros. The funds required to recapitalize the country's banks exceed the Rp 218 trillion the government plans to spend in this entire year. Set in a slightly different context, the figure is close to the entire worth of the Indonesian economy, which in 1998 had a gross domestic product (GDP) of Rp 375 trillion.
The monetary authorities may have their reasons for wanting to press on with the task quickly, but that should not prevent a thorough public debate of the matter. After all, it is the public's money which will be used to finance the program.
Under the program, the government has pledged to provide 80 percent of the fresh capital required to bail out each bank that qualifies for the scheme. The funds will help to bring banks' capital adequacy ratios (CAR) up to the minimum four percent now required by the government. Due diligence is currently being undertaken in all of the country's 208 banks to establish which have met the required ratio, which have not, and which of this latter group will be entitled to government assistance.
The government has announced that it plans to issue bonds to raise money to help finance the recapitalization program. The total cost of servicing these bonds has been placed at Rp 34 trillion in 1999/2000 alone. The government has said that Rp 18 trillion of this money will come out of the state budget, with the remainder to be raised through the sale of banks' assets.
Conspicuously absent from recent official statements is any explanation of the impact which these measures will have on the economy. By issuing bonds rather than providing a fresh injection of cash, the government may minimize the impact the scheme has on inflation. However, the move will put the government into direct competition with the private sector for fresh capital, meaning that interest rates will have to be maintained at their current high levels for considerably longer than would otherwise have been necessary. There are also the nagging questions of what interest rate the government will offer to make the bonds attractive, and how much buyers, presumably foreigners, will really be prepared to pay.
How banks will be selected to participate in the program is an altogether more disturbing question. There are currently three categories into which banks are placed. Banks with a capital adequacy ratio greater than 4 percent need no assistance and are therefore given an A rating. Banks with a ratio above minus 25 percent and less than 4 percent are considered deserving of assistance and given a B, while C is reserved for banks with a CAR smaller than minus 25 percent and considered to be beyond help.
The use of the CAR level may seem an indiscriminate and objective way of selecting banks, but it overlooks the fact that some banks may be in their current predicament as the result of poor and reckless management, or through lending excessively to companies within their own business groups. Although it is true that many professionally-managed banks are now in difficulty because of a large number of borrowers defaulting on loan repayments, many others are where they are today simply because they were run by crooks. To assist such banks would raise a moral dilemma to which not even the government could provide a satisfactory answer. Pursuing the bail out program indiscriminately would send the wrong signals to the banking community, and would tacitly condone the gross mismanagement which resulted in this mess in the first place.
Nobody disputes that restructuring the banking sector is central to attempts to resuscitate the economy. The country needs a sound banking sector if it is to shake off the current crisis. Having said that, the public must get a full explanation of where every penny of their Rp 300 trillion goes. Only then can they be sure that it is being wisely spent.