Asian govts gamble economic rebound will fix banks

Asian govts gamble economic rebound will fix banks

SINGAPORE (Dow Jones): Asian governments are gambling that a
percolating U.S. economy and a hoped-for resurgence in Japan will
restore rapid growth in their economies and offer an easy fix for
their deep-seated financial-sector headaches, bank analysts and
credit raters say.

"If Asia resumes 'tiger' growth of 7 percent to 10 percent,
then it's likely that non-performing loans will decline; people
will forget about them and all will be okay," says Philippe
Delhaise, president of Thomson BankWatch Asia.

"But I am pessimistic. If you have to rely on the U.S.
carrying on as it has to fix banks (and corporate) in Asia, then
it is a bad bet to take."

Analysts say it appears increasingly clear that governments
and banks are daunted by the complex task of rehabilitating
balance sheets, and reluctant to push through with expensive and
potentially unpopular reforms.

"The costs are going to be staggering. The social and
political fall-out will be high as cash-strapped local
shareholders are forced to reduce their company stakes and find
new investors - investors that would most likely be foreigners,"
said a banking analyst at a U.S. investment house in Singapore.

But clearly the situation is precarious. Standard & Poor's
said Thursday that Indonesia is suffering the world's worst
banking crisis since the 1970s, measured on a fiscal cost-to-
gross GDP basis.

The credit rating agency estimates that the crisis could cost
the Indonesian government US$87 billion, or 82 percent, of GDP,
to recapitalize or pay out creditors.

Indonesia's banking predicament ranks far worse than the
current crises in Thailand, South Korea and Malaysia, which
Standard & Poor's estimates will cost 35 percent of GDP, 29
percent, and 22 percent, respectively.

"An expectation that the Indonesian banking sector's non-
performing loans-to-total loans will reach about 75 percent-85
percent by the end of 1999 supports the view that the recovery of
Indonesia's banking sector, back to its pre-crisis position, will
be protracted," the agency stated.

Faced with those huge costs, analysts say Asian governments
will instead simply choose to copy what Malaysia's Bank Negara
did in the mid-1980s, when an economic downturn pushed non-
performing loans above 34 percent. At the time, the central bank
chose to gamble that economic growth in the coming decade would
be enough to sustain and recapitalize crippled domestic banks -
banks that would otherwise have been merged, sold-off,
nationalized or closed.

Bank Negara won the bet as regional annual growth hit double
digits, thanks in part to a phenomenal U.S. economy, which roared
to life in the 1990s.

"I'm afraid that most countries are gambling that this will
happen again; that growth will make non-performing loans - the
declared, hidden and strategic ones - disappear," says a bank
analyst at a U.S. bank in Singapore. "If growth does not come
back, the region will be in serious trouble. That's when bad
loans - especially the ones that aren't being talked about yet -
will start hitting and there are many more than you think."

The Bank for International Settlements 69-th annual report,
issued this week, also raised concerns about how difficult it
will be for monetary policy to offset the damage done by the
rapid credit contraction that took place in Asia since mid-1997.

Easing monetary policy would indeed lower short-term interest
rates and probably steepen the yield curve. The U.S. managed to
do this in the early 1990s, creating what has become a massive
driver for the global economy, especially for Asia's exporters.

But the BIS report cautions that an over-easing of monetary
policy in Asia's small, open economies could trigger renewed
disorderly conditions in foreign exchange markets.

In Indonesia, for example, a recovery in the banking sector is
expected to take a decade, analysts and raters say. Negative
interest spreads, a lack of substantial new bank capital from
private-sector sources, an unclear legal environment for debt
recovery, and the sheer magnitude of the government's task to
rebuild an entire banking industry are obstacles to a speedy
recovery. At the same, the country is immersed in an uncertain
and protracted parliamentary and presidential election process
that will continue through November.

"Unlike elsewhere in Asia, where banks are more strongly
capitalized and where operating earnings are already positive,
Indonesian banks will have weak capitalization and poor earnings
ratios even after the recapitalization," Salomon Smith Barney
said in a report this month.

The recapitalization will bring capital adequacy to only 4.0
percent - half the internationally-accepted standard and less
than half the levels prevailing in Asia's other crisis-hit
banking systems, Salomon Smith Barney said.

"A further contributor to the severity of Indonesia's crisis
is the pivotal economic role played by domestic banking given the
underdeveloped local equity and debt markets," S&P said.
Meanwhile, the BIS report said schemes for addressing region-wide
bank problems - complemented by proposed restructurings and bail-
outs of viable corporate - had "not gone far beyond their
conceptual state" by early-1999.

The lack of real progress in addressing what is needed to fix
and stabilize the region's financial sectors has therefore led to
this growing fear that governments will be secretly content to
take the easy way out: Let a continuing strong U.S. economy and a
resurgent Japanese economy re-energize Asian market growth, to
fill in the financial potholes.