Japanese bank warns of dire RI risks

Japanese bank warns of dire RI risks

TOKYO (Reuters): Indonesia faces the risk of a banking sector meltdown and a political break-up that could trigger a financial crisis, a senior official of the Japan Bank for International Cooperation (JPIC) said on Friday.

Takuma Hatano said Japan, Indonesia's biggest creditor, supported the three-year program of financial recovery measures that Jakarta is drawing up with the International Monetary Fund.

"I think Indonesia can basically implement that program and obtain a soft landing, but still the political risk is very hard to anticipate," Hatano, JBIC's executive director for Asia and Oceania, told a press lunch.

Hatano singled out the risk of the political disintegration of the sprawling island archipelago, engulfed by a rising tide of separatist and religious violence.

"Is there any country which has the risk of a (political) split that can implement a very harsh IMF program over three years? Nobody knows," Hatano said.

JBIC is owed more than US$33 billion by Indonesia.

Hatano said the worst case would be if the central government's revenue-sharing arrangements broke down as a result of political unrest.

He said Indonesia President Abdurrahman Wahid had himself mentioned that risk at a recent meeting.

Loss of that revenue would threaten Indonesia's fiscal sustainability, especially if the cost of rescuing the country's battered banking system mounts, the JBIC official said.

Indonesian banks suffered tremendous damage during the past two years of political and economic turmoil.

The cost of recapitalizing the banks has already reached 5 percent of national income, and Hatano said he feared their non- performing loans could exceed the published level of 60 percent of total loans.

"We are very much concerned, or afraid, that the Indonesian banking sector is almost, you could say, in a meltdown," Hatano said.

Despite the problems facing Indonesia, Hatano reaffirmed Japan's opposition to any reduction of Indonesia's official foreign debt, which Jakarta puts at about $72 billion.

He described as adequate simply rescheduling loan principal -- but not interest -- as assumed by the IMF agreement Indonesia is now finalizing. "Conventional rescheduling is sufficient to finance the balance-of-payments gap," Hatano said.

The views of the JBIC count because it is the organization that projects Japan's economic muscle overseas.

Formed last October from the merger of the Japan Export-Import Bank and the Overseas Economic Cooperation Fund, JBIC's functions range from official development aid to the promotion of Japanese investment overseas and export financing.

With $207 billion in loans outstanding, it is bigger than the World Bank. Sixty-five percent of JBIC's loans go to Asia and Indonesia is its biggest client.

As such, Indonesia's agony presents the bank with a serious management challenge, but Hatano was able to see the lighter side.

He said he had joked to Wahid that the bank's initials should stand for "Japan Bank for Indonesian Cooperation".