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)