Govt to sell bonds worth billions of dollars to BI

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)