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)