Most banks put their faith in risk-free promisory notes

Most banks put their faith in risk-free promisory notes

JAKARTA (JP): The fact that most of banks still prefer to
invest their money in the relatively risk-free SBI notes rather
than lend money to the real sector could also add to the economic
uncertainty.

Indeed, the amount of bank money invested in SBI notes jumped
by Rp 7.28 trillion to Rp 79.52 trillion in Augut this year from
the level prevailing in December last year.

"In an environment of a relatively high default risk, then SBI
is the safest investment alternative, although banks will not
gain much margin," Martin said.

According to the Infobank monthly magazine, around 45 percent
of bank assets is in the form of the SBI and inter bank notes, 30
percent in credit, 5 percent in liquid assets and 20 percent in
other forms of assets.

Others said that bankers were still traumatized by the banking
crisis, prompting them to be very careful in running their banks.

"I think there are still psychological barriers for banks to
lend more money due to past bad loan problems," said senior Bank
Indonesia official Halim Alamsyah.

He said that many bank owners and managers were still fearful
that lending mistakes could lead to severe punishment from the
authorities.

Halim said that this fear was the result of the current public
condemnation of bankers accused of bad management and lending
practices in the past which cost the taxpayer dearly in financing
the government's bank bailout program.

"Legal certainty and protection for bankers is not clear. We
can always become a suspect or a witness at any time in a bad
debt case," said a banker who declined to be named.

"But how long will this trauma last," asked one prominent
businessman.

Senior banker I Nyoman Moena called on Bank Indonesia to take
action to force banks to lend more money to the real sector,
particularly small and medium enterprises.

"There are opportunities for the banks in the case of small to
medium enterprises with relatively low risks," Moena said.

But Bank Indonesia deputy governor Achjar Iljas said that the
central bank would no longer act as it did in the past, forcing
banks to do whatever the central bank wished.

"Now is no longer the era of Bank Indonesia forcing domestic
banks to do something like channeling more money," Achjar said.

But he did admit that Bank Indonesia had "talked" with the
bankers over the lending problem.

Meanwhile, Bank Indonesia director for bank supervision Siti
Fadjriah said that accelerating the corporate debt restructuring
program was crucial to help banks resume their intermediary
function.

"After the bank recapitalization program is completed, the
restructuring (of the corporate sector) should be the next
priority," she said.

Pressure on rupiah, inflation

Stability in the exchange rate of the rupiah against the U.S.
dollar is seen as the corner stone of Indonesia's economic
recovery. But analysts warned that pressure on the rupiah was
still high amid continuing domestic political problems and slow
progress in major economic reform programs, particularly with
regard to corporate debt restructuring.

"The huge amount of corporate overseas debt maturing in 2001
will become potential pressure for the rupiah," said Bank
Indonesia's Muliaman.

The depreciation of the rupiah against the dollar could ignite
inflation because the country's production system is still
heavily dependent on imported raw materials.

Muliaman said that the central bank would face a dilemma: on
the one hand Bank Indonesia should tighten its monetary policy in
a bid to stabilize the rupiah and curb inflationary threats while
on the other hand the central bank must relax monetary policy to
promote economic growth.

"The potential for the rupiah to depreciate and inflation to
increase is still high. This must receive special attention," he
said.

The rupiah dropped to around Rp 9,500 per U.S. dollar late in
November, which was a 25 percent fall from the level in January,
due to a combination of internal and external factors.

The government forecasts that the rupiah will average around
Rp 7,800 per dollar next year.

The rising political pressure against President Abdurrahman
Wahid, better known as Gus Dur, to step down amid bloody
sectarian clashes and separatist demands in several parts of the
country has created jitters among investors which, in turn, is
putting pressure on the rupiah.

Coordinating Minister for the Economy Rizal Ramli, however,
has played down fears of Gus Dur being attacked by a coalition of
Muslim parties and other hardliners in the legislature as long as
Vice President Megawati Sukarnoputri still provides him with
support. And Megawati, the chairwoman of the largest party,
namely the Indonesian Democratic Party of Struggle (PDI-P), has
called on her party members not to impeach the President.

The slow progress in corporate debt restructuring and delays
in the sale of assets managed by IBRA could affect investor
confidence in the economy. The recent delay in the sale of the
government's majority shares in Bank Central Asia and Bank Niaga
until the first quarter of 2001 had partly contributed to the
decline in the value of the rupiah.

The regional factor, particularly the weakening of other major
currencies in the region against the U.S. dollar, has also
contributed to the weakening of the rupiah.

The Danareksa Research Institute said in a November Warta
Ekonomi report that the effect of domestic political problems on
the rupiah were only dominant until June, from July to September
the dominant factors were economic, and in October it was the
regional factor.

The IMF has urged Bank Indonesia to boost interest rates to
help stabilize the ailing currency. But the central bank seems to
be reluctant to follow the advice of the Fund, although the
benchmark interest rate of the one-month SBI notes has increased
from around 13.74 percent in early November to around 14.15
percent late in the month.

Raising interest rates by one percent would increase the
state's budget burden by around Rp 6 trillion in financing the
payment of interest on the government's bank recapitalization
bonds.

Some analysts also doubted the effectiveness of the high
interest rate policy as shown by the 1998 experience when the
rate jumped to more than 70 percent but the rupiah kept sliding.

Increasing the interest rate even further would also backfire
on the economy as it would deter the new investment which is
badly needed to boost economic growth and create more jobs.

Analysts have said that the central bank should instead
intervene in the currency market as the country's foreign
exchange reserves of nearly US$29 billion should be enough to
intervene in thin volume markets with daily transactions of less
than $500 million.

There has also been a suggestion that the government should
also engage in some form of currency control as has happened in
Malaysia, but such a prospect would not be effective in Indonesia
for various reasons including the weak bureaucratic system and
the possible opposition of the IMF, which is providing the
country with the cash for its multibillion dollar bailout.

Analysts, however, have said that the Fund might finally agree
to allow the government to take some form of measures to push
exporters to park their earnings at home to help stabilize the
local currency. Indonesia's export volume has been hovering at a
record level of around US$5 billion but the exporters have kept
the money overseas.

Exporters said that they need the money to finance the import
of raw materials, and exchanging their dollar revenues for rupiah
at home would mean risking a greater cost when they wanted to
convert back into dollars amid the volatility of the rupiah.

Some exporters have suggested that the government provide them
with interest rate subsidies for taking a currency swap facility.
Under such a scheme, exporters could change their dollar earnings
into rupiah at a bank, and in the future could get back the hard
currency at an agreed exchange rate.

But to enjoy this facility, the exporters must pay a certain
amount of interest, and they are demanding that the government
subsidize this interest rate cost.

Budget burden

The government's huge domestic debt, arising particularly from
the financing of the country's bank restructuring and
recapitalization program, poses another threat to economic
stability.

The government has issued around Rp 650 trillion worth of
bonds to finance the bank bailout program. The burden on the 2001
state budget from covering the interest cost of the government
bonds totals Rp 53.4 trillion, which is almost equal to the Rp 54
trillion allocated to finance the various subsidy programs to
help the poor families survive economic hardship or greater than
the Rp 43.9 trillion allocated for financing various development
programs like infrastructure and education.

Initially, the interest cost of the bonds in 2001 was
estimated at more than Rp 56 trillion, but it could be reduced to
the new figure with the assumption that around Rp 10 trillion of
the bonds could be retired in 2001, to be exchanged for bank
loans under the management of IBRA, and another Rp 24.5 trillion
would be financed by Bank Indonesia.

But there are still doubts whether the plan could proceed
well.

The loans under IBRA management are basically non-performing
loans (NPLs). The agency must restructure the NPLs to become
performing loans to allow them to be exchanged for the government
bonds.

With IBRA already busy trying to meet the government target of
raising some Rp 27 trillion in cash in 2001 by selling its
various bank assets, it is hard to imagine that the agency could
also meet the target of coming up with around Rp 10 trillion in
performing loans at the same time.

Bank Indonesia, the independent central bank, may not allow
the government to proceed with the plan immediately, particularly
if the loans to be transferred to the banks would still cause
damage to the capital adequacy ratio (CAR) of the banks.

Sources said that Bank Indonesia wanted a six-month period
after the loans had been restructured by IBRA before they are
transferred to the banks.

CAR is the ratio between capital and risk-weighted assets.
Government bonds are considered as risk-free assets, while loans
are seen as assets with 100 percent risk.

Amid the remaining uncertainty in the economy, particularly in
the real sector, transferring the loans back to the banks could
cause a deterioration in the CAR condition of the banks, and risk
a second bank crisis.

Some also have doubts as to whether the government could
manage the debt burden.

"It would cause great concern because the government has no
experience in managing such a huge domestic debt," said a senior
official at a state-owned bank.

He also said that until now it was still uncertain which
agency would manage the debt. He said that the plan according to
the government Letter of Intent to the IMF was to form a debt
management office under the finance ministry, but there had been
no significant progress with the plan.

Failure to manage such a huge amount of public debt could
cause a fiscal disaster that would risk sending the government
into bankruptcy.

The World Bank has said in one of its reports that the burden
on the state budget would peak in 2004 when around Rp 130
trillion worth of the bonds matured, and again in 2008 when
another Rp 150 trillion maturesd. (rei)