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.