Central bank governor upbeat about bank recapitalization

Central bank governor upbeat about bank recapitalization

HONG KONG (Bloomberg): Details of Indonesia's bank bailout plan will be unveiled by the end of the month, and will include the issue of some bonds that will trade in the capital market, the country's central bank governor said on Monday.

"I am optimistic that a group of banks will be recapitalized in the month of January," said Sjahril Sabirin in an interview.

Indonesia plans to inject about Rp 300 trillion (US$37.5 billion) into troubled banks over the next few months to rebuild a financial industry shattered by bad loans and the collapse of the country's currency. Analysts and investors have been eagerly awaiting details of the plan to determine the impact on the broader economy and the currency.

"If the bailout is 300 trillion it's going to be interesting to see where they're going to get the money," said Albert Jan Hofman, head of Asia fixed-income research at ABN Amro N.V., in Singapore. "We are treating the information that's coming out of Indonesia with a wait and see approach."

"The government will be issuing 'two or three' types of bonds in exchange for banks' equity as part of the bailout, Sjahril said, which would include fixed rate and 'adjustable' rate bonds based on the three-month benchmark interest rate.

Sjahril has said in the past that some of the rupiah- denominated bonds will have an interest rate of about 20 percent, or about 3 percent higher than the government's target for inflation in fiscal 2000.

"When we announce the recapitalization of the banks the breakdowns of the bonds can be released," Sjahril said.

Having bonds that are tradable "would leave the economy subject to a rise in yields on the secondary market as banks needed to raise liquidity, and similarly force Bank Indonesia to purchase some of the bonds," Desmond Supple, head of research at Barclays Capital in Singapore, wrote in a report last week.

"It is highly probable that the bank bailout will have a greater fiscal and monetary cost than the government assumes," and cash injections into the banks could help weaken the rupiah.

Balking at cost

Indonesian legislators are also balking at the Rp 18 trillion set aside in the country's fiscal 2000 budget for coupon payments on the bonds. Another Rp 16 trillion will come from the sale of bank assets.

Sjahril said that he was hopeful that he would be able to convince Indonesia's House of Representatives that the bank bailout was necessary for the economy to recover.

"I'm still optimistic that we can convince the legislators that there is no other alternative for going all the way through with this process," Sjahril said. "Otherwise the economy cannot be revived."

The government expects the economy will shrink 15 percent in the year ending March 1999, with no growth predicted in fiscal 2000. Banks have essentially halted lending because they lack funds and bad loans stand at more than 60 percent.

The government has already said it will buy bad bank loans as part of an overall plan that will provide banks with fresh assets and an income stream that will allow them to resume lending. The plan is similar to efforts to recapitalize banks in Thailand and Korea.

While political and economic stability is a main driver of the local currency's exchange rate with the U.S. dollar, Sjahril said it could gain ground against the dollar in the first half of 1999.

"There is still room for the rupiah to strengthen in the months to come," Sjahril said. "As long as the very bad thing as what happened in May does not recur, I am more optimistic that we can maintain the stability of the exchange rate."

The rupiah has been steady at about Rp 8,000 to the dollar since October, after trading weaker than 17,000 to the rupiah earlier in 1998.

Riots and student demonstrations in May toppled former president Soeharto after 32 years in power. The country will hold a general election in June, which could generate more unrest. Although he was unwilling to give a target on the inflation rate, Sjahril said it may ease further.

The government predicts inflation will slow to 17 percent in fiscal 2000 from 66 percent in fiscal 1999.