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.