Still in the doldrums

Next to preparing a budget, bank and corporate restructuring should be the focus of the government's economic reform program and the core of any recovery plan. The restructuring of these two sectors should go hand-in-hand; banks need sound borrowers to lend to while corporations cannot grow without the help of a robust banking sector.

Yet, the bank recapitalization program is now almost three months behind schedule due to the fallout of the Bank Bali scandal, and domestic and foreign debt restructuring has been crawling at a snail's pace.

The delay has caused the "bleeding" at the country's two largest banks to worsen, steadily raising their recapitalization costs. Bank Mandiri, formed in early August through the merger of four state banks to become Indonesia's largest bank, received an injection of Rp 103 trillion (US$15.1 billion) in treasury bonds in mid-October, more than two and a half months behind schedule. Now it may need another Rp 50 trillion, instead of Rp 34.8 trillion as earlier estimated, to raise its capital adequacy ratio to the minimum 4 percent.

State Bank Negara Indonesia (BNI), the country's second largest bank, is still awaiting Rp 52.6 trillion in fresh capital. The longer this money is delayed the larger the risk of closure for overseas BNI branches.

It is alarming that core institutions of our banking system are virtually bankrupt, kept in operation only by the support of the government's guarantee scheme for bank deposits and claims.

The impact of the delayed implementation of bank and corporate (debt) restructuring is clearly reflected in the steady decline of both exports and imports in the first nine months of this year. Foreign trade data shows that our economy remains in the doldrums, with most manufacturing companies operating far below capacity.

As long as large and medium-size companies remain mired in foreign and domestic debt, they will continue to be denied access to badly needed working capital to finance production. Because most domestic banks operate with negative capital or very low capital, their letters of credit are not accepted by overseas banks. Small wonder then that the country cannot increase its exports despite the sharp depreciation of the rupiah.

It therefore is imperative for the government to give top priority to bank and corporate restructuring, with the most urgent task being accelerating the recapitalization of banks to enable them to resume lending. Any further delays would only increase the cost of recapitalization at the expense of taxpayers.

But the recapitalization of banks must occur concurrently with corporate restructuring, otherwise banks will find it extremely difficult to find viable businesses to finance.

Many foreign creditors have been frustrated by the laid-back attitude adopted by many Indonesian debtors, and this wrangle has sabotaged the restoration of international confidence in the economy, even after the country's political uncertainty was resolved with the election of a legitimate government.

To help regain this confidence, the government should further strengthen the commercial courts to handle bankruptcy cases; not to lead as many businesses as possible into liquidation, but to force corporate debtors to negotiate in good faith with their creditors. As long as the commercial courts remain weak and short of competent judges, debtors, most of whom simply stopped servicing their debts last year, will continue with their laid- back attitude, hoping an eventual economic recovery will automatically resolve all their problems.