Michael Richardson, Singapore – By taking control of 14 troubled banks, the Indonesian government is walking a fine line between backing a reform of the banking system that won't undermine public confidence and causing a damaging run on financial institutions, analysts said Sunday.
The move by the government to freeze the operations of seven shaky banks and take over the management of seven others is seen as crucial to reaching a new agreement with the International Monetary fund. The agreement, expected this week, will restore urgently needed loans to Indonesia in exchange for extensive economic reforms, including a cleanup of the banking sector. Since it put together a package of loans valued at $43 billion in October to shore up Indonesia's dwindling foreign-exchange reserves and help halt the precipitous fall in its currency, the IMF has been insisting that Indonesian authorities take tough measures to restore investor confidence even if they hurt companies with close connections to the government of President Suharto.
Two of the seven banks that had their licenses frozen Saturday were partly controlled by one of Indonesia's richest businessmen, Sudwikatmono, who is Mr. Suharto's cousin. Two other banks were controlled by another influential businessman, Hashim Djojohadikusumo, whose brother is a key military commander married to one of Mr. Suharto's daughters.
In addition, Mohamad (Bob) Hasan, a timber tycoon and close associate of the president who became industry and trade minister in the cabinet chosen by Mr. Suharto last month, has a substantial stake in one of the seven banks placed under the management of the Indonesian Bank Restructuring Agency.
Ginandjar Kartasasmita, the coordinating minister for economics and finance, said there should be no doubt about the government's commitment to the IMF reform package. "We need economic reform, and we will implement all the reform program seriously," he said.
The IMF withheld a $3 billion installment of the loans last month, saying Indonesia was not carrying out some important reforms it had pledged to apply.
The Fund's deputy managing director, Stanley Fischer, emerged from talks with Mr. Suharto in Jakarta on Friday expressing confidence that a letter of intent covering renegotiated terms of the loans-for-reforms deal would be signed soon.
In an interview with Reuters on Sunday, Mr. Fischer said negotiations with Jakarta were going well, but he declined to gauge the commitment of Mr. Suharto, who usually has the last word on important decisions in Indonesia. Mr. Fischer said that an IMF review team had been impressed by the "seriousness and professionalism" of the government team.
"The big question in Indonesia always is the commitment of the president," he said. "I don't think, given their record, we could make a judgment now as to how committed everybody is. The only way we can tell is as the program is implemented."
Indonesian officials said clear criteria had been used to select the 14 banks. The seven slated for closure required liquidity injections from the central bank in excess of five times their total equity and 75 percent of their total assets.
Iwan Prawiranata, chairman of the restructuring agency, said the government could not "continue to allow unsound banks to affect the normal operations of the rest of the banking system."
When the previous cabinet closed 16 ailing banks in November, the effectiveness of the move was undermined by several of Mr. Suharto's relatives whose interests were affected.
Analysts said that any such challenge this time would be a severe blow to the government's credibility.
They also said that further measures were needed to reduce the number of banks through closures and mergers, ease the burden of bad loans and strengthen official regulation.
"I think it's a good move but incomplete," said Pande Silalahi, an economist at the Center for Strategic and International Studies in Jakarta. "The government has neglected to explain what is going to happen with the remaining troubled banks."
Indicating that further moves would follow, Finance Minister Fuad Bawazier said 54 banks had come under the surveillance of the restructuring agency, which was set up by presidential decree in January.
Reaffirming the government's commitment to protect all legitimate depositors and creditors of the 14 banks under its official guarantee system, officials said deposit accounts with the seven suspended banks would be transferred to a state-owned bank and that depositors should have access to them by Monday.
The other seven banks will continue to open for business as usual, with their managements replaced by agency staff and by managers from several state banks, they said.
While analysts generally welcomed the move as a useful initial step in putting the banking sector on a sounder footing, they expressed concern over the possible impact on public confidence. They also raised the possibility of repercussions on other listed companies belonging to the conglomerates whose banking arms were suspended or taken over by the government.
Seven of the banks targeted for reform Saturday were listed on the Jakarta Stock Exchange, including major institutions such as Bank Dagang Nasional Indonesia, belonging to the Gajah Tunggal group, and Bank Danamon of the Danamon group.