BI loan probe may boost confidence: Experts

BI loan probe may boost confidence: Experts

The Jakarta Post, Jakarta

A new investigation into the alleged misuse of Rp 138.4
trillion (about US$13 billion) of Bank Indonesia (BI) liquidity
support loans, could be a good opportunity to bolster public
confidence in the government, but a failure to deliver results
could prove costly to the country's frail economy, experts said.

Economic and banking analyst Ryan Kiryanto at Bank Negara
Indonesia said a new investigation would put Indonesia's legal
system to the test.

"It (the investigation) will show whether this government has
the courage to bring about legal reforms," he told The Jakarta
Post.

Last week, a BI official said the International Monetary Fund
(IMF) had asked the government to begin a new probe into the
mishandled liquidity support funds.

Both parties agreed to appoint an independent consultant for
the case, and to add it to the draft of the fourth Letter of
Intent (LoI), according to the official.

This shows the government is serious about corruption, which
has been a major turn off to foreign investors, Ryan said.

Two separate investigations have gone into the case, without
leading to any prosecutions or the return of the funds.

At the peak of the 1997 financial crisis, BI channeled a
massive Rp 144.5 trillion into liquidity support for local banks
hit by massive cash problems.

A report by the Supreme Audit Agency (BPK) later revealed that
almost all of the funds, or Rp 138.4 trillion were lost.

BPK blamed Bank Indonesia for neglecting its own rules that
led to the vast abuse of the state funds.

Most of the loans were channeled to the cash-strapped banks
before BI had obtained its independent status in May 1999 through
the Central Bank Law.

BI actually extended the loans while it had been under the
IMF's direct supervision.

Given the magnitude of this case, Ryan said, the government
could expect strong resistance from implicated bank owners.

According to the BPK report, around Rp 100 trillion went into
banks owned by the family and friends of former president
Soeharto.

"There will be pressure (against the government)," Ryan said.

He also warned that failure to show progress would again
accentuate the government's inability to tackle corruption.

The LoI's high exposure to the foreign investment community
also meant the damage to investor confidence could be devastating
if the government is unable to carry out its pledge.

The IMF may suspend its loan program if the government misses
its LoI targets. For that same reason, the IMF withheld last
year's loan tranche worth US$400 million.

Coming at a higher cost is the subsequent absence of foreign
investment -- capital needed to spur economic growth.

Regional banking analyst Lin Che Wei at SG Securities said
solving the loan abuse case within a short time could be
difficult.

"Sure we all want this case to be solved, but I am concerned
about the practicalities of the investigation," he said.

Any findings will inevitably affect debt deals with owners of
banks that had received liquidity loans.

To repay the loans, bank owners have surrendered their assets
to the Indonesian Bank Restructuring Agency (IBRA) under a deal
known as the Master of Settlement and Acquisition Agreement
(MSAA). These assets are now for sale.

Che Wei said meddling with the MSAA would interfere with
IBRA's asset sales program, putting at risk its revenue target,
which finances the state budget deficit.

But an advisor to the Finance Ministry, Anggito Abimanyu said
the job of the independent consultant was to calculate how much
the government and the central bank must each pay for the
apparently abused funds.

BI said it could shoulder only Rp 24 trillion of the Rp 138.4
trillion that went missing under its charge.