Analysts praise bank bonds issue

Analysts praise bank bonds issue

JAKARTA (JP): Analysts welcomed on Saturday the government's
move to issue bonds worth Rp 103.83 trillion (US$12.82 billion)
to recapitalize 23 ailing banks as a positive step.

But they cautioned that the challenging task of resolving the
massive amount of problem loans and nonperforming loans (NPLs) in
the banking industry still lay ahead.

"This is positive because it's a step which we've been waiting
for after being delayed for some time," Ferry Y. Hartoyo, head of
research at securities firm PT Vickers Ballas Tamara, told The
Jakarta Post.

I Nyoman Moena, a senior banker and former Bank Indonesia
director, also welcomed the step, saying it was part of the
overall economic reform needed to rebuild the shattered economy.

The two, however, warned that settling the NPLs of the banking
sector was much more crucial in rebuilding the battered industry.

Finance minister Bambang Subianto issued on Friday floating-
rate bonds worth Rp 95.15 trillion, and fixed-rate bonds worth Rp
8.68 trillion to recapitalize 11 private banks and 12 provincial
development banks.

Bambang also announced the issue of Rp 53.78 trillion index-
linked bonds to repay Bank Indonesia loans, provided under the
government deposit guarantee scheme, to depositors and creditors
of the 48 banks closed in 1998 and 1999.

The government recapitalization program is designed to raise a
bank's capital adequacy ratio (CAR) to the minimum 4 percent
level for private banks, and to 8 percent for provincial
development banks.

CAR is the ratio between capital and risk-weighted assets.

Indonesian banks' capital has severely deteriorated due to
huge piles of NPLs and a negative interest rate spread resulting
from higher interest rates offered for time deposits compared to
interest charged on loans.

But Ferry said the banks would continue to suffer if the huge
problem loans in the industry were not restructured.

"So the restructuring of the real sector is the key to a
complete turnaround in the banking industry," he said.

The injected capital from the recapitalization program is to
replace the NPLs transferred from the recapitalized banks into
the Indonesian Bank Restructuring Agency (IBRA).

Moena said that resolving the huge amount of NPLs was
particularly crucial to helping finance the huge cost of
recapitalization.

The government has been under fire over the huge cost of the
recapitalization program. The cost is much larger than initially
estimated, particularly for private banks due to the persisting
negative spread problem.

Moena said the huge cost of the recapitalization program would
be a strain on the state budget.

Some analysts speculate that the government will have to drop
various subsidy programs to pay for the greater recapitalization
cost.

The government has allocated some Rp 34 trillion in the
1999/2000 fiscal year to finance the interest rate cost of the
bonds issue.

The floating-rate bonds carry a market interest rate linked to
the interest rate of three-month Bank Indonesia promissory notes
(SBIs); fixed-rate bonds have a coupon rate of 12 percent and 14
percent depending on their maturities; and index-linked bonds
have a coupon rate of 3 percent plus inflation.

Bambang said a restructuring program for the real sector would
help resolve the problem of banks' nonperforming loans and would
improve the banks' performance and provide revenue for repaying
the government bonds.

"We want to improve the market value of the banks by improving
their loan portfolio to allow the government to divest its
interest in the banks (at profit)," Bambang said.

He also said the restructuring of NPLs by IBRA was expected to
provide the government with additional income.

Bambang also said confiscated fixed assets of closed down
banks and their loan portfolios would be the source for financing
the index-linked bonds.

"So the restructuring program of the real sector is key to
financing the bond issue," Bambang said.

But restructuring the real sector seems to be easier said than
done, particularly as many of the businesses are in a dire
straits due to the economic crisis.

Ferry said the recapitalization cost for the first 23 banks
was not much, pointing out that it would cost much more to
recapitalize the country's seven state banks in the future. It is
currently estimated at Rp 244.8 trillion.

He also said the financial burden of recapitalization was
expected to lessen as the interest rate of three-month SBI notes
was declining.

He added that a longer maturity of the bonds would also lessen
the fiscal strain.

"Most of the bonds are floating-rate instruments with coupon
rates linked to three-month SBIs. And we're expecting an interest
rate of around 20 percent by the end of the year," Ferry
said. (rei)