Govt to sell bonds worth billions of dollars to BI

JAKARTA (JP): The government plans to sell bonds worth tens of billions of dollars to Bank Indonesia to fund the bank recapitalization program, a senior minister said on Wednesday.

Coordinating Minister for Economy, Finance and Industry Ginandjar Kartasasmita told journalists after meeting President B.J. Habibie that fresh funds were needed "to improve the capital structure of the banking sector so that banks can improve their capital adequacy ratios."

"But the government will sell the bonds to Bank Indonesia and not to the public," Ginanjar added.

Ginandjar's statement is supported by a central bank bill which the government presented to the House of Representatives on Wednesday.

The bill stipulates that Bank Indonesia is prohibited from directly buying debt instruments issued by the government, except those falling under the auspices of the bank recapitalization program.

The announcement should end recent uncertainty over how the government plans to finance the recapitalization of more then 70 domestic commercial banks through a program which has been costed at Rp 257.5 trillion (US$34.3 billion).

The government has said that it plans to provide up to 80 percent of the capital required by banks qualifying for the program. Bank owners will be required to provide the remaining 20 percent.

The total cost of interest payments due on the bonds in the 1999/2000 fiscal year is expected to be Rp 34 trillion.

The government has set aside Rp 18 trillion in the draft state budget for 1999/2000 to cover part of this cost, while the remaining Rp 16 trillion is expected to come from the sale of assets belonging to banks taken under government control.

The period over which the bonds will mature has yet to be announced.

Most observers believe that the program will be nothing more than a "paper recapitalization". They expect the government to provide banks with "paper" bonds which can be sold to investors rather than inject fresh funds into the banks.

Ginandjar's confirmation that the bonds will be sold to Bank Indonesia raises a question over where Bank Indonesia will get the funds required to purchase the bonds. The easiest way would be to print more money, a move which would result in high inflation.

But a Ministry of Finance official, who requested anonymity, said that Bank Indonesia would pay for the bonds in installments to avoid creating excessive inflationary pressures in the economy.

"Bank Indonesia will draw up a timetable which will govern when banks will be allowed to draw their money. That should reduce inflationary pressures," she said.

Minister of Finance Bambang Subianto said on Tuesday night that some of the money had already been channeled into the banking system through liquidity credits which had reached Rp 116.79 trillion as of Jan. 7.

Liquidity credits will be converted into government equity stakes in the banks which have received this assistance, provided that they qualify for the recapitalization program.

For a bank to qualify for the program, it must have a capital adequacy ratio of between 4 percent and minus 25 percent. (rid/prb)