A Rp 300t question
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.