RI banking sector future 'still gloomy'
RI banking sector future 'still gloomy'
NEW YORK (Dow Jones): Moody's Investors Service says that even
if the proposed bank recapitalization plan for the Indonesian
banking system is successfully implemented, the immediate ratings
implications are limited, as the sector continues to face major
hurdles on the path to recovery.
In a report published last week, Moody's says challenges for
the Indonesia banking system include:
* The high cost of recapitalization.
* The potential for further political and social instability to
curb economic recovery and to delay foreign investment in the
banking sector.
* The resource, political and social constraints upon further
legal and regulatory reforms and their rigorous implementation.
* Moody's also expects that the ability of Indonesian banks to
repay foreign currency obligations will continue to be restricted
by the general shortage of foreign currency in Indonesia.
The rating agency recognizes that after a slow initial
reaction to the unfolding banking crisis, significant efforts are
now being made to address the collapse in Indonesia's banking
system.
However, in Moody's opinion, the current bank recapitalization
program is not a cure-all. Furthermore, it raises the specter of
moral hazard.
If blanket recapitalization is offered to all Category "B"
banks, but not to financially stronger Category "A" banks, the
plan risks creating the impression that in the future, poor
performance will be tolerated and that banks will be bailed out
as necessary.
The cost of the recapitalization program will be very high,
Moody's says, with the government's own estimate at close to Rp
300 trillion (US$40 billion), or just under one third of forecast
1999 Gross Domestic Product.
Furthermore, Moody's highlights that several assumptions have
been made which, if incorrect, will potentially increase even
further the cost of maintaining banks at the 4 percent capital
adequacy ratio (CAR) desired by the Indonesian authorities:
* That interest rates will fall in 1999.
* That the rupiah will not devalue once more.
* That the Indonesian economy is close to bottoming out.
* That banks eligible for recapitalization, including
government-controlled banks, will be able to raise 20 percent of
the additional capital required to bring them to a 4 percent
capital adequacy ratio.
* That reforms to bankruptcy laws will be effective.
* That effective bank supervision can be established.
In addition, Moody's has certain further concerns:
* That political agendas will cause further delays and lessen
the effectiveness of reforms.
* That given the inherent risks in Indonesia stemming from
possible further economic, political and social uncertainty,
adherence to a 4 percent or even an 8 percent capital adequacy
ratio standard, will not automatically ensure fundamentally
strong banks.
* The true (as opposed to paper) capitalization of banks will
depend on whether those assets which are truly non-performing
have been accurately identified and transferred in their entirety
to the Indonesian Bank Restructuring Agency's Asset Management
Unit.
The proposed recapitalization brings only a modest amount of
true fresh capital to the Indonesian banking system.
Despite this, in Moody's opinion, to the extent that this
increases confidence, which ultimately leads to renewed bank
lending, the measures are positive.
Nevertheless, the agency stresses that the planned
recapitalization is only one element in a complex series of
reforms that need to be undertaken to ensure a return to long-
term health for Indonesia's banks.
Ruling -- page 12