RI banking sector reforms draw wary response in U.S.
RI banking sector reforms draw wary response in U.S.
NEW YORK (Reuters): The Indonesian government's banking and corporate sector reforms offered a glimmer of hope that steps may finally be taken to shore up the financial system, U.S.-based analysts and banking sources said.
But they added that the sketchy details unveiled on Tuesday left many questions unanswered.
"The mechanics are not clear," said Luis Luis, director of emerging markets research at Scudder Stevens and Clark. "The big error is that the Indonesian government did not do it earlier."
The broad financial sector reforms include government guarantees of bank obligations and opening the sector to foreign ownership. The government also announced that indebted companies would temporarily halt debt repayments in order to work out arrangements with borrowers and lenders.
Luis said the Indonesian government has to tackle the twin problems of insolvency and illiquidity in the banking system to restore confidence.
The recapitalization of insolvent banks could involve boosting bank reserves through selling bad loans to government agencies or swapping loans for equities.
But the U.S market will watch closely to see just how the central bank would provide basic liquidity without simply printing more money, Luis said.
U.S. experts were also skeptical of the Indonesian government's ability to offer guarantees for depositors and creditors at all the country's commercial banks.
"It's like signing a blank check," said a banking source. "The claims and contingent claims could add up to some huge numbers."
The commitment smacked of "hollowness" unless there was some reliable figure defining the liabilities, he said.
To be sure, Indonesia tried to tackle the financial sector problems in November by closing 16 financially troubled banks as part of the conditions for receiving a $43 billion bailout from the International Monetary Fund.
"The Indonesian government should have strengthened liquidity in the banking system, while weeding out the weak banks," he said.
The debacle showed that the ramifications of banking reforms in Indonesia remain uncertain, the analyst said.
Compared to the long-term impact of banking reforms, the emergency measures to allow indebted Indonesian companies to halt debt payments was downplayed by some analysts as an extension of the status quo.
Many Indonesian companies, hit by the rupiah's slump since last August, had already asked their creditors for delayed payments and the government simply formalized the arrangement, said Feroz Talyarkhan, managing director of Asian fixed income research at Bear Stearns and Co.
The rupiah was at 2,755 to the dollar when Indonesia abolished its system of exchange rate bands on Aug. 14, and fell to as low as 15,000 early this month. It rose to 11,000/11,200 on Tuesday, in part boosted by central bank intervention.
London
In London analysts said a clear-cut resolution to Indonesia's foreign debt problems is unlikely.
While some believed an agreement was possible on some form of Brady bond -- U.S. Treasury-backed instruments used in the past to help developing countries pay off defaulted loans -- others said that type of restructuring was out of the question.
They said it was more likely that individual agreements would need to be reached between foreign lenders and Indonesia's private sector.
Indeed, if the government did not guarantee the country's private debt and repackage the corporate sector debt into a government bond issue, analysts said creditors would certainly lose out.
"Today's announcement was just an official recognition of what everyone already knew and it has been the case that corporates have not been paying their bills on external debts for some time," said Sara Zervos, emerging market strategist at BZU.
Indonesia said it estimated some 228 companies in the country had problems debt servicing problems.
Approximately $66 billion of Indonesia's $140 billion in overseas debt consists of corporate debt, although not all of that amount will be affected by the servicing freeze.
"They are going to have to do individual agreements. I don't see a national restructuring plan as a strong possibility," she said.
"This is going to be a long-term process because...when you have that many creditors and that many companies it's going to be hard to come up with a cohesive agreement on a broad scale like what Korea is going to be doing."
Brady bonds were named after former U.S. Treasury secretary Nicholas Brady who proposed a plan in the late 1980s to help reduce the debts of developing countries with IMF and World Bank funds through bonds typically collateralized by U.S. Treasury securities.
Another emerging market debt specialist at a foreign bank in London also doubted the viability of a Brady-style plan.
"It may be something that smells of it but it won't be a Brady plan," he said.
"It may be some kind of restructuring where the state takes on the obligations of the corporates but it is all up in the air at the moment," he added.
Other analysts were a bit more optimistic, believing that although exchange controls could not be ruled out, a restructuring deal was on the cards later on.
"I think there is a possibility that we still may get capital control...but once things have calmed down a bit we will get some formal restructuring agreement and that can only be good," said Neil Lockwood, senior emerging market analyst at ANZ Investment Bank in London.
"It will put an end to all the uncertainty and it will ensure that everyone will be paid, albeit they may have to wait some time."
Asked what type of deal might be struck, Lockwood replied: "The most likely would be a formal bond, a Brady style issue and that is the kind of thing the Koreans have tried to avoid, but whether the Indonesians have got such a strong bargaining position I very much doubt."