RI bank crisis world's worst: S&P

RI bank crisis world's worst: S&P

SINGAPORE (AFP): Indonesia is experiencing the world's worst banking crisis since the 1970s and may need to spend US$87 billion to revive the sector, credit rating firm Standard and Poor's warned on Thursday.

"Indonesia is suffering the world's worst banking crisis since the 1970s as measured on a fiscal cost-to-gross domestic product basis, and may take up to a decade to fully recover," it said in a statement.

The agency's estimate of what it would cost to initially recapitalize or pay out creditors of ailing banks constitutes 82 percent of gross domestic product (GDP).

The estimated cost of saving the banking sector, 24 percent higher than the Indonesian government's projection of $70 billion, makes it "among the highest of financial crises transpiring in the past two decades."

The recovery is expected to be protracted due to the banks' level of non-performing loans, which are expected to reach 75 to 85 percent of total loans by the end of 1999, and the difficulty of disposing of distressed assets, said Terry Chan, director of financial institutions ratings at Standard and Poor's.

Indonesia's relatively low GDP of $107 billion contributed to the high cost of the banking crisis, the agency said.

"A further contributor to the severity of Indonesia's crisis is the pivotal economic role played by domestic banking given the underdeveloped local equity and debt markets," it added.

The warning came amid market euphoria over the peaceful conduct of Indonesia's general elections last Monday, the freest in over four decades in the world's fourth most populous nation.

But the Indonesian rupiah remained stable after the warning, trading in Singapore around Rp 7,730 to the U.S. dollar.

Indonesia's new government and its banking authorities would have "not much room to maneuver" in policies to rebuild the whole Indonesian banking system," Chan told a news conference in Singapore.

"When it comes to the banking sector, the facts are pretty obvious and quite stark. Regardless of who is in charge, this is the task they have to address," he said.

The Standard and Poor's estimate of recapitalization costs came two weeks after Jakarta's decision to issue bank recapitalization bonds worth Rp 103.8 trillion.

"But one worry is that they have delayed the recapitalization of the larger state-owned banks to probably second half of the year," Chan said, citing the state-owned Bank Negara Indonesia which was still undercapitalized.

Another concern was the difficulty the private sector banks were experiencing in coming up with their 20 percent share in recapitalizing their banks.

Foreign banks such as Standard Chartered and Australia and New Zealand Banking Group which have taken stakes in Indonesian banks could give these banks the needed push to restart operations, but their fortunes would remain linked to the overall scenario, Chan said.

"There's no use being the best bank if your operating environment is in dire straits," he said.

Immediately implementing recapitalization would be the first step in closing the negative spreads now faced by Indonesian banks due to high interest rates on deposits.

"I do agree it's a tough balancing act for the banking authorities. How can we push down interest rate spreads without endangering general confidence?" he said.

"The best approach is not to be slow. You know what has to be done, you've stated your policies, just bite the bullet," he added.

Standard and Poor's reiterated that Jakarta's plans to return the banks to a capital adequacy ratio of 4 percent was "far inadequate" and even if banks met the minimum requirement of eight percent stipulated under Bank for International Settlement (BIS) rules, this would still not be enough.

Chan said, however, that the protracted recovery of Indonesia's banks presents the opportunity to "build up a sound banking system over the next decade" that can rebound far better if cyclical downturns or a new crisis occur.