WB calls on Indonesia to expedite asset sales

WB calls on Indonesia to expedite asset sales

SINGAPORE (Dow Jones): The Indonesian government needs to accelerate bank asset sales and state bank reforms to kick start the economy, World Bank country director Mark Baird said on Wednesday.

The governments needs to push the Indonesian Banking Restructuring Agency, or IBRA, into quickly recovering or selling nationalized bank assets, he said, even though critics may claim the assets were sold to foreigners too fast and at fire-sale prices.

"Banking restructuring to date in Indonesia has progressed slowly, and to its credit, the government has made no mistakes... but there is a danger that the government may end up with a large state enterprise and not a very efficient one," Baird said.

He was at a Singapore conference on Indonesia in the aftermath of June 7 parliamentary elections.

The government has to date closed 66 banks, taken over 11 others, and placed nine others in a recapitalization program. It gave IBRA the task of dealing with the RP 230 trillion (US$33.8 billion) worth of assets and nonperforming loans.

James Castle, chairman of the Jakarta-based consultancy Castle Group, said such a massive "de facto nationalization of assets" hasn't been seen since 1949 in communist China.

Baird said it's important for IBRA to reintroduce financial sector assets back into the market in order to get the economy rolling again.

Castle said "the recycling of distressed assets" is key, because "that's where the new money will come from," in terms of a higher tax base, employment, investment and consumption.

"That's what will get Indonesia out of its current economic crisis," he said.

Baird said there are early, clear signs of economic recovery in Indonesia, with low inflation, a stronger rupiah and falling interest rates buoying investor confidence.

"But an economic recovery is far from assured. The short-term private unhedged external debt held by insolvent and closed corporations is still there. That's why bank and corporate restructuring is such a high priority," he said.

State banks - once restructured and recapitalized - can also play a role in kick starting domestic consumption, but the reform process is going slower than what has been seen with private banks, he said.

Baird also said banking supervision is often the overlooked piece in the bank restructuring puzzle.

"But it's an important one, in order to avoid similar financial sector problems in the future," he said.

Castle said that despite the problems associated with the economic crisis, Indonesia's economy hasn't stopped functioning.

He said major institutions have not ground to a halt, the military has remained generally neutral through an ongoing democratic election process, and political party tension is so far relatively dormant, following the June 7 parliamentary elections.

"Four months ago, to describe the conditions today would have been considered on the far side of optimism," he said.