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Jakarta faces $30bn bill to heal banks

Financial Review - December 11, 1998

Greg Earl, Jakarta – The Indonesian Government is facing a damage bill of at least $30 billion to recapitalise more than 60 banks after the dual impact of bad lending practices and the economic crisis.

The Government is planning to offer up to 80 per cent of the new capital needed by about 45 private banks as long as they can raise the additional 20 per cent and provide business plans for the next three years which move towards international capital adequacy standards. It has decided to offer the money to banks that have a capital adequacy between 4 per cent and negative 25 per cent, and the banks are expected reach 8 per cent in three years.

Earlier this week Indonesia's President, Dr B.J. Habibie, said he would like to see the current 200 banks shrink to about 50, but many other industry observers say the country is likely to end up with fewer than 10 significant banks because of the difficulty of meeting the new capital requirements.

The Finance Minister, Mr Bambang Subianto, said on Wednesday that of 150 operating banks that had been audited, 54 had a capital adequacy above 4 per cent, 56 fitted into the category eligible for government capital assistance, and 40 were below negative 25 per cent which meant they were destined for closure.

But the biggest burden comes from six State banks which will be recapitalised at a cost of about $27 billion despite falling into the closure category for private banks.

Mr Bambang said it was more effective to provide the $27 billion to the State banks than simply to liquidate them and pay off depositors, which would have cost about $70 billion. Four of the State banks are already being merged into one new institution with a view to partially privatising the bank in the future, and the one partially listed State bank, Bank Nasional Indonesia, is hoping it can raise some new capital on the stockmarket.

This week Lippobank, which is regarded as one of the strongest of the large private banks, kicked off the first rights issue capital raising to pave the way for it to be eligible to seek the government funding.

The huge recapitalisation will initially come out of next year's State budget but then is intended to be funded by the issue of government bonds – though it remains unclear how successful Indonesia will be in issuing the bonds.

The recapitalisation program has been delayed several times because of disagreements over strategy and arguments about saving specific banks, and last week Standard & Poor's warned that the banking system would remain weak despite the injection of government capital.

Several prominent economists this week warned against using a simple cut-off percentage to judge which banks were eligible for new capital, saying the Government should be more selective.

Earlier this year the Government took over four banks – including the two largest private institutions, Bank Danamon and Bank Central Asia – which Mr Bambang said would cost about $19 billion to recapitalise if their owners attempted to do that.

Meanwhile, there are new signs that the recent violence in Indonesia has hurt the economic recovery that started in October with a drop in the inflation rate and a sharp rise in the value of the rupiah. Tourism officials say arrivals in Bali have been affected by the recent upheaval, in contrast to the middle of the year when Bali was booming despite a slowdown in tourism in other parts of the country.

State-owned gold miner PT Aneka Tambang, a delayed privatisation candidate, warned that its privatisation had been further hurt by an attack on the mine by illegal miners last week after a confrontation with police. The company said the damage bill from the attacks was likely to be as much as $2 million, and foreign investors would be disturbed by the incident.