S&P's downgrades its ratings on 15 Indonesian banks

S&P's downgrades its ratings on 15 Indonesian banks

JAKARTA (JP): U.S. rating agency Standard & Poor's (S&P's) has
downgraded its ratings of 15 Indonesian banks due to various
uncertainties, including those associated with the country's plan
to introduce a currency board system.

S&P's said yesterday the rating downgrades reflected its
concerns over the incompleteness of the government's guarantee on
bank obligations, continued market turmoil -- including potential
mergers -- and new minimum paid-up capital requirements.

The long-term local currency ratings on Bank Internasional
Indonesia (BII) and state Bank Negara Indonesia (BNI) remain on
CreditWatch because of uncertainties associated with the possible
introduction of a currency board by the government.

A currency board system would peg the rupiah to a foreign
currency, possibly the U.S. dollar, at a fixed exchange rate.

The rating agency said a government implementation of the
system would run the risk of intensifying an already tight
liquidity situation and further undermine the strength of the
Indonesian banking sector.

The CreditWatch placements are likely to be resolved following
a clear government decision on the currency board plan, the
agency said.

The government's currency board plan has raised concern among
analysts and major donors to Indonesia. The International
Monetary Fund has threatened to cut off its US$43 billion rescue
fund if the country proceeds with the plan.

Supporters of the system claim it is an appropriate mechanism
to stabilize the rupiah and revive Indonesia's ailing economy,
which has been badly hit by the currency crisis.

S&P's specified that BNI's proposed takeover of state Bank
Tabungan Negara was a CreditWatch issue.

The other banks downgraded by the agency are Bank Bali, Bank
Bumi Daya, Bank Central Asia, Bank Dagang Nasional Indonesia,
Bank Dagang Negara, Bank Ekspor Impor Indonesia, Bank Rakyat
Indonesia, Bank Tabungan Negara, Lippo Bank and Panin Bank.

BNI, BII, Bank Danamon, Bank Niaga and Bank Umum Nasional were
placed on CreditWatch, pending a resolution on the timeliness of
the government's guarantee on bank obligations.

A CreditWatch highlights an emerging situation which may
materially affect the profile of a rated corporation and can be
designated as positive, developing or negative.

Following a full review, the rating may either be affirmed or
changed in the direction indicated.

Guarantee

The government announced in January that it would guarantee
foreign currency and rupiah-denominated claims by depositors and
creditors (excluding loan capital and subordinated debt) of all
locally incorporated banks (excluding banks closed by the
government in November).

Under the guarantee, the government will pay foreign currency
claims in rupiah at the market exchange rate quoted by Bank
Indonesia, the central bank. The guarantee is effective for a
two-year period, expiring Jan. 31, 2000, with a possible
extension of a further six months.

Non-deposit obligations greater than an equivalent of $2
million must be registered with the Indonesian Banking
Restructuring Agency (IBRA), a government body set up to
rehabilitate banks.

While the mechanism for payments under the government
guarantee imply that repayments will be timely, the guarantee
does not cover all creditors, S&P's said.

The agency said the guidelines underlying the guarantee's
implementation indicate that the government, through IBRA, has
the right to set off a bank loan extended to a depositor or
creditor against that party's deposit or debt obligations
regardless of loan maturity, and to exclude certain creditors,
such as related parties.

Technically, these rights, however well-intended, render the
guarantee incomplete, undermining the support necessary to
maintain the existing local currency ratings, S&P's explained.

While the guarantee is for an initial two-year period, S&P's
ratings are beyond the range of the guarantee period, the agency
said, adding that the local currency ratings take into
consideration both the incompleteness of the government guarantee
and longer-term profiles of each bank once the guarantee expires.

In the case of foreign currency claims, payments under the
government guarantee will be in rupiah. S&P's said the repayment
in a currency not originally contracted for would be regarded as
a breach of financial obligation.

The agency said the foreign currency ratings on Indonesian
banks reflected their innate capacity to repay obligations rather
than their reliance on the government guarantee.

S&P's said downgrades were also affected by the government's
recently announced requirement for each bank to have a minimum
paid-up capital of Rp 1 trillion by the end of 1998, Rp 2
trillion by the end of 2000 and Rp 3 trillion by the end of 2003.

Only 10 banks currently satisfy the Rp 1 trillion requirement,
the agency said, adding that the majority of the country's 212
banks are expected to have to merge to meet the new capital
guidelines, changing the industry's dynamics. (08)