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