Economist warns of a second banking crisis

JAKARTA (JP): Noted economist Sri Mulyani warned the government on Tuesday that it must retire part of its outstanding bank recapitalization bonds within the next two years to help reduce pressure on the state budget.

Sri said that failing to reduce the outstanding bonds could bring another crisis to the country because the 2003 budget would be overly burdened when some of the bonds and the International Monetary Fund loans started to mature.

"Retiring some of the bonds is very crucial," she told a seminar on banking and the economy.

She said that the burden on the 2003 state budget from the maturing bonds and the IMF loan alone could reach a whopping Rp 130 trillion (US$15.29 billion).

She added that it would be unlikely for the country's international creditors grouped in the Paris Club to provide another rescheduling facility for debts maturing in 2003 because of soaring oil prices in developed nations.

The Paris Club of creditor nations agreed last year to provide the country with a rescheduling facility for debts falling due in 2000 and 2001. The facility has been a great relief for this year's and next year's state budget.

The IMF has been providing multibillion dollar bailouts to the country since late 1997.

The government has issued some Rp 450 trillion worth of bonds to help finance the country's bank recapitalization program. The state budget covers the interest rates of the bonds, which amount to around Rp 60 trillion in 2001 compared to around Rp 38 trillion this year.

The cost of servicing the bonds and government foreign loans next year is estimated to be 40 percent of total spending. The government has to rely on foreign loans to help plug the budget deficit.

Government officials have said that part of the government public debt management strategy is to swap some of the bonds with performing loans under the Indonesian Bank Restructuring Agency (IBRA) and developing domestic bond market.

IBRA deputy chairman Jerry Ng said Tuesday that the bond swap measure was expected to start next year.

IBRA currently manages some Rp 250 trillion worth of non- performing loans (NPLs) transferred from closed-down and recapitalized banks. The agency is mandated to restructure the NPLs into performing loans.

Swapping the performing loans with part of the bank recapitalization bonds will reduce the burden on the state budget.

The government is also planning to replace part of the bank recapitalization bonds with short-term six to twelve-month bonds to help create a more active secondary bond market.

Short-term bonds are deemed to be more appealing to investors.

An active secondary bond market will lure investors to help refinance the government's bank recapitalization program, thus reducing the state budget burden.

So far, recapitalized banks have failed to sell the bonds to investors who had been demanding huge discounts.

An active secondary bond market will also help banks sell bonds to raise cash to be used for credit expansion.

Jerry said that although most of the recapitalized banks under IBRA had shown improving performance in terms of capital adequacy ratio and positive net interest margins, their balance sheets were still dominated by government bonds.

"This means that the source of their income is still from the interest rates of the bonds," he said, pointing out that a bank's source of income should come from lending activity.

He said that a dependence on government bonds was not healthy for the banks.

"This is the challenge in the banking sector that must be resolved," he said.(rei)