RI banking reforms hampered: Moody's

RI banking reforms hampered: Moody's

Agence France-Presse, Jakarta

A political stalemate and lack of legal certainty are
hampering efforts to reform and restructure Indonesia's banks,
Moody's Investors Service warned Monday.

The global ratings agency said the banks' financial strength
ratings have seen a modest recovery due to recapitalisation,
intensive restructuring, upgrading programmes and tighter
regulation.

But it said in its annual report on the country's banking
system that the ratings "remain hostage to a largely unfavorable
operating environment, low economic capital and potentially
volatile earnings."

The New York-based agency said the outlook for the ratings is
stable.

But it said that at an average of a "very modest" E+, in the
short- to medium-term they continue to be determined "largely by
political considerations."

It cited a wide range of conflicting political and social
agendas which has led to policy stalemate that is stifling
progress in reform and restructuring.

The lack of legal certainty also hampered operations and
undermined creditor protection.

Moody's said that political stalemate had also adversely
affected investor sentiment, resulting in a weaker rupiah which
threatens the viability of a number of debt restructuring
exercises that have already been completed, with negative
implications for bank asset quality.

"Possibly, one of the most important catalysts for change in
Indonesia's banking system may be increased foreign ownership in
Indonesian banks. The forthcoming sale of a majority stake in
Bank Central Asia will serve as a litmus test as to the
feasibility of such a development," it said.

Indonesia is in the process of selling its majority stake in
the country's largest retail bank, Bank Central Asia. British-
based Standard Chartered is among the leading bidders but the
sale has attracted opposition from politicians and bank
employees.

"Longer term, if political and social stability prevail,
Indonesia's banking market offers the potential of attractive
margins, which could help banks attract fresh capital and rebuild
their financial strength relatively swiftly," said vice-president
Patrick Winsbury, the report's author.

Moody's said the outlook for Indonesian bank deposit ratings
is largely stable at the sovereign ceiling of Caa1 because of the
government guarantee which is expected to remain in force until
July 2003.