Can bank liquidations help restore RI economy?

Can bank liquidations help restore RI economy?

The sudden two-week postponement of the government's plan to
close down ailing banks caught many by surprise. Economist Kwik
Kian Gie doubts whether the closure of the banks, if carried out,
will help restore the deteriorating economy.

JAKARTA (JP): The restructuring of the banking industry will
enter a new stage after the planned liquidation of banks which
clearly have no prospects of surviving the economic crisis.

The plan to close down these banks is understandable because
the government established a liberal criterion for them; namely
to raise their equities above minus 25 percent of their net
weighted assets.

It is a wonder that these banks can continue to operate
because their daily spending results in a loss of their
depositors' funds. This is really unfair because this fact is
never known by the depositors who put their trust in the banks.

Therefore, the government's decision to guarantee the savings
of depositors is correct. To provide these funds, the government
can take over the assets of the troubled banks, sell them and
make up the balance with its own money. However, this move would
most likely run up against public resistance because the
government, in order to be fair to depositors, would use public
money collected from taxpayers.

To assure that the measure was also fair to the public, the
government would have to state that the deteriorating banking
industry must be salvaged at all costs, otherwise all economic
activities would collapse because the banking industry is
something like the "heart" of the economy. But can the economy be
restored if the banking industry is salvaged at all costs? This
question makes people anxious because they know the magnitude of
the present economic deterioration.

Even though Minister of Finance Bambang Subianto explicitly
said on one occasion that bad loans in the banking industry
reached only Rp 300 trillion (US$33.3 billion), he hinted on
another occasion that the bad loans actually reached between Rp
600 trillion and Rp 700 trillion. This figure is far higher than
the country's gross domestic product of Rp 380 trillion. The
government clearly will not be able to cope with these bad loans
with its state budget, which is expected to reach a little above
Rp 200 trillion for the 1999/2000 fiscal year.

It is also questionable whether the government-sponsored bank
recapitalization program will be able to salvage the banking
industry.

Under the program, the government will provide 80 percent of
the funds needed for the recapitalization of banks whose capital
adequacy ratio is between minus 25 percent and 4 percent. The
banks' shareholders will supply the other 20 percent of the
funds. In the 1999/2000 fiscal year, the first year of the
recapitalization program, the government will allocate Rp 18
trillion of its budget for the recapitalization program and use
Rp 16 trillion of the money generated from the planned sales of
the banks' assets to finance the program.

The recapitalization program will merely help keep banks
"afloat". However, without a recovered Indonesian economy to
support them, the banks cannot be restored to health without a
comprehensive measure for the restoration of the banking
industry. Needless to say, such a measure would require a large
amount of funds.

As already known, the main cause behind the deterioration of
the banking industry was that some of the banks' debtors
intentionally refused to repay their debts. Other debtors could
not afford to repay their loans because their factories, which
depended on imported materials, shut down their operations after
the sharp appreciation of the U.S. dollar from Rp 2,400 per
dollar in July 1997 to about Rp 9,000 at present.

The government failed to defend the rupiah's value because of
a shortage of foreign exchange reserves. Because its foreign
exchange supply largely depends on the gradual disbursement of
aid from creditors led by the International Monetary Fund, the
government has had to introduce "piecemeal" policies to overcome
the economic crisis.

So, the recapitalization and planned liquidation of banks will
not be able to restore the banking industry. There is nothing the
government can do besides merely keeping banks "afloat" and
preventing them from "drowning". The restoration of the banking
industry, therefore, will depend very much on a "miracle".

Some parties believe that the economy will recover if the June
7 general election runs smoothly and the People's Consultative
Assembly is able to appoint a credible president and vice
president. If these things do occur, these parties believe,
investment would flow back into the country.

But which investors will put their money back into Indonesia?
Domestic investors who have sent their capital out of the country
will hesitate to reinvest here because they will be afraid of
being sued for bad debts. Their possible reentry into the country
is through foreign-incorporated companies.

Foreign investors will be wary of entering Indonesia before
domestic companies repay their debts, totaling some $80 billion.
Probably only new investors who have no problem loans in
Indonesia will be willing to do business here when investment
conditions become more conducive.