BI warns of dangers faced by bank reform program

BI warns of dangers faced by bank reform program

JAKARTA (JP): Bank Indonesia director Subarjo Joyosumarto
warned on Saturday that the country's bank restructuring program
will only be successful under a stable macroeconomic condition.

Subarjo said that based on experiences in other countries,
efforts to revive the ailing banking sector could not be
implemented amid a high inflation and interest rate environment.

"Such an interrelatedness indicates that a bank restructuring
strategy is not enough by only considering the micro aspect
without efforts to maintain the macroeconomic stability," he was
quoted by Antara as saying in a speech at a business seminar in
Yogyakarta.

He said that the bank restructuring program should also go
hand in hand with restructuring in the real (nonfinance) sector.

The warning from the architect of Indonesia's bank
restructuring program came amid indications of a slowing down in
the country's key economic reform programs following recent signs
of increasing confidence in the crisis-hit economy. A stalled in
much-needed economic reform programs could threaten the local
currency and the overall macroeconomic condition.

The government is planning to finance up to 80 percent of the
recapitalization of nine private banks, and the full financing of
the country's seven state banks, 27 provincial development banks
and 11 private banks taken over by the Indonesian Bank
Restructuring Agency (IBRA).

The government will finance the recapitalization program by
issuing bonds, which could be worth over Rp 500 trillion (US$58.8
billion). The government originally estimated the bonds would be
worth about Rp 300 billion but the worsening of the targeted
banks' balance sheets will certainly cause a significant increase
in the recapitalization funding requirement.

The government has yet to announce details of the planned bond
issue, but Bank Indonesia Governor Sjahril Sabirin has stressed
that banks receiving the bonds would only be allowed to sell a
portion of the bonds on the open market to avoid inflationary
pressure and causing the rupiah to weaken.

Experts warn that the banks may be tempted to flood the market
with the bonds in a bid to raise cash for financing cash-strapped
companies and repaying debts.

The government is expected to issue the bonds sometime in
June, possibly after the June 7 general election.

Several opposition leaders as well as business leaders have
strongly criticized the government bank restructuring program.

Analysts say that the recent signs of rising confidence in the
economy may give others a reason to stall the country's economic
reform programs.

One of the signs of a perceived returning confidence include
last week's rally in the stock market driven by inflow of foreign
funds; the entry of the U.K.-based Standard Chartered Bank into
Bank Bali; the debt restructuring deals reached by PT Bakrie &
Brothers, state-owned Danareksa and PT Astra International with
their foreign creditors; a deflation of 0.18 percent in March;
and a more stable rupiah of about Rp 8,500 to the dollar.

The delay in the restructuring of the country's 20 largest
debtors of state banks is seen as an indication of a stall in the
real sector restructuring program.

The government had earlier promised the IMF that the measure
would be take by April 30. The government has said that debtors
failing to reach a restructuring agreement would be liquidated.

The 20 largest debtors are the country's well-connected
businesspeople who owe some Rp 60 trillion in nonperforming loans
to state banks, which, according to IBRA have over Rp 100
trillion in nonperforming loans.

A restructuring deal of the 20 largest debtors is expected to
give momentum to the overall restructuring of the real sector,
which is prime treatment to help stop the bleeding of the banking
industry.

Analysts have said that without restructuring the huge
nonperforming loans, it would be impossible to bring down the
high domestic interests, which has caused banks to suffer a
negative interest rate spread problem, and which further
deteriorates banks capital condition. (rei)