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)