Recapitalization not enough to cure economy

Recapitalization not enough to cure economy

JAKARTA (JP): The government's bank recapitalization program
is not sufficient to revitalize the country's crippled banking
system and depressed economy, analysts have said.

Hartojo Wignjowijoto, a senior economist at the Asian Pacific
Economic Consultancy, said on Wednesday that the banking industry
now was too ill to respond to "medical treatment".

"The government did nothing when it was told that the banking
industry was about to collapse. Now the government comes with
help when most of the banks are dying," he said during a seminar
on liquidation in the banking industry.

Separately, Coordinating Minister for Economy, Finance and
Industry Ginandjar Kartasasmita said in Bali on Wednesday that
about 96 out of more than 200 banks in the country are currently
insolvent with negative net worth of around US$40 billion.

"This is clearly an untenable long-term situation," Ginandjar
was quoted by Dow Jones as saying at an Indonesia-Australia
business forum.

Hartojo said that even if the recapitalization program ran
smoothly, it would be difficult to restore the country's ailing
economy because even an improved banking system could not
function well if the uncertain political and social situation
continued.

Tony A. Prasetiantono of Yogyakarta's Gadjah Mada University
told the same seminar that the recapitalization program alone
would not be effective in restoring the economy if the government
did not settle other banking-related problems.

"The bank recapitalization will only be effective under the
right condition. That includes eliminating what we call moral
hazards in the banking industry, high interest rates, merger and
acquisition problems and law enforcement problems," Tony said.

"If these problems are not settled, then the recapitalization
program will only be like pouring water into a leaky can. It will
be useless and meaningless, and will only result in huge losses
to the government," he said.

Tony added that punitively high interest rates would make it
almost impossible for banks to resume lending to businesses.

The central bank's benchmark interest rate stood at 37.3
percent on Wednesday.

The government estimates it will need about Rp 300 trillion
(over US$35.29 billion) to recapitalize some 80 private and state
banks. It will issue long-term bonds to provide 80 percent of the
recapitalization funds, while banks which are eligible to join
the program will provide the remaining 20 percent.

Banks which are eligible for the recapitalization program are
those which have a capital adequacy ratio (CAR) of between less
than 4 percent and minus 25 percent. These banks are classified
as category B banks.

CAR is the ratio between equity capital and risk-weighted
assets.

Category C banks are those with CARs of less than minus 25
percent. Banks in this category may be closed-down and liquidated
if the bank owners do not inject funds into the banks to raise
their CARs. Banks in category A are not required to join the
recapitalization program because their CARs are at least 4
percent, the minimum level required by the government.

Hartojo said that the recapitalization program was not a
solution to reviving the moribund banking sector because it was
not clear where the money for the program would come from.

Both Hartojo and Tony said they were skeptical that the bonds
issued by the government to raise the recapitalization funds
would be attractive to local or foreign investors.

If the government offers high interest rates to attract bond
investors, the move could be counterproductive because it would
prompt banks to maintain high interest rates, they said.

Another economist from Gadjah Mada University, Sri Adiningsih,
said that the country's bank restructuring program was not
progressing quickly enough.

Speaking at the same seminar, Sri nonetheless urged the
government to go ahead with the recapitalization program because
further delays would only ruin the already crippled banking
sector.

"The restructuring is progressing too slow. Time is very
valuable here. The longer it is delayed the more costly it will
be," she said.

In a related development, Glen Yusuf, chairman of the
Indonesian Bank Restructuring Agency, said on Wednesday that nine
banks had confirmed their commitment to acquire 500 branch
offices of the insolvent banks to be closed on Saturday.

"Since the acquisition will also cover employees, at least
10,000 jobs, which would otherwise be wiped out by the closures,
will be saved," Jusuf said after meeting with Minister of
Manpower Fahmi Idris.

Glen declined to identify the nine banks concerned. (gis/rms)