Four banks under IBRA insolvent

JAKARTA (JP): Four of six troubled private banks taken over by the Indonesian Bank Restructuring Agency (IBRA) in April have been declared insolvent, according to a letter to the International Monetary Fund (IMF) outlining the latest progress on reforms.

The letter said the overall strategy for banking sector reform remained unchanged and that the government would move expeditiously to complete the restructuring of the six banks in the next few weeks.

Negotiations are currently underway with buyers interested in acquiring some of the banks and deals could be concluded after non-performing loans are transferred to IBRA's asset management unit, according to the letter drafted by the office of the Coordinating Minister for Economy, Finance and Trade.

It said one bank would be sold by August 21.

It was not clear if a previous threat to liquidate the insolvent banks if shareholders failed to recapitalize them would be carried out.

The six banks under IBRA management are Bank Danamon, Bank Umum Nasional, Bank Tiara, Bank PDFCI, Bank BDNI and Bank Modern.

The banks were taken under IBRA control because they used Bank Indonesia liquidity support in excess of 500 percent of their total equity.

IBRA announced early last month that the assets of the four banks now declared insolvent were much smaller than reported by their respective managements and that large sums of money were needed if they were to meet the required year-end capital adequacy ratio of 4 percent.

Bank Danamon is short of Rp 28.3 trillion, Bank Umum Nasional requires Rp 10.47 trillion, Bank PDFCI needs Rp 3.2 trillion, and Bank Tiara needs Rp 2.89 trillion. Results of audits on the other two banks have not been made public.

Indonesia's banking sector has been badly hit by the sharp depreciation of the rupiah, the year-long economic crisis, and dwindling confidence in the sector.

The government has injected Rp 140 trillion into the sector to help ailing banks.

The four insolvent banks may face bankruptcy petitions from their creditors after the new bankruptcy law becomes effective on August 20 unless the banks' owners or new investors inject huge amounts of fresh money.

The update letter also said that Bank Bumi Daya and Bank Bapindo, both of which are state owned, would be merged by August 21. Non-performing loans in the banks' portfolios will be transferred to IBRA's asset management unit before the merger goes ahead.

The update also said that portfolio reviews of all seven state banks were underway and revealed that a major international bank has been enlisted to design and assist in implementing comprehensive operational reforms and restructuring of all state banks.

The letter to the IMF said the country's economy would shrink 15 percent in this fiscal year, much higher than the government's previous estimate of 12 percent.

It said that Indonesia's current account deficit in this fiscal year was unsustainable over the longer term and would be halved in the next fiscal year. The deficit is expected to be 8.5 percent of gross domestic product in the fiscal year ending in March 1999.

The letter went on to say that the budget would be balanced again in three years time.

The external current account is expected to record a surplus equivalent to 2 percent of GDP in 1998/1999 and to remain in surplus until a recovery is fully underway.

The balance of payments position has been strengthened by additional international financing and the prospect of official debt rescheduling. The letter said gross external reserves are projected to rise to US$24 billion by the end of next March compared to $19.54 at the end of July.

International donor institutions recently agreed to provide the country with an additional $14 billion in aid. The new funds will be used to finance the yawning gap in the budget which has resulted from the government's commitment to subsidize certain important commodities to help the poor survive the economic crisis.

"While the medium-term outlook remains uncertain given the severity of the crisis, our objective is to restore sustainable economic growth with low inflation as quickly as possible," the letter said.

The letter also said the government was working toward achieving single digit inflation within no more than two years.

Year-end inflation is forecast to reach 80 percent. Inflation of almost 60 percent was recorded between January and July of this year.

The letter said the decline in output was expected to bottom out in early 1999 and significant positive growth would resume no latter than 2000. (rei)