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".