Indonesia acts to revive its ailing banking sector

Temporary freeze on debt servicing proposed
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INDONESIA yesterday announced fresh reforms to revive its stalled banking sector and moved to address the crisis over its private sector debt by proposing a temporary freeze on servicing of outstanding corporate loans.

The measures, unveiled at separate press conferences here by Finance Minister Mar’ie Muhammad and Indonesia’s debt advisor Radius Prawiro, included state guarantees for depositors and creditors with Indonesian commercial banks, the lifting of curbs on foreign ownership of banks and setting up a new agency to “rehabilitate” the banking sector.

Indonesia also announced a committee to renegotiate outstanding payments to foreign creditors, along with the proposed credit freeze. “A temporary pause in foreign currency debt servicing, both of interest and capital, would be needed for … companies to allow time for new arrangements to be worked out between lenders and borrowers,” Mr Prawiro, appointed by President Suharto to oversee the debt crisis, told reporters later.

In establishing the repayments committee and calling for a temporary freeze on loan recalls, the government denied that it was seeking a debt moratorium.

But analysts said that in reality a de facto moratorium was in place, because the corporate sector was in default on many of its loans.

Indonesian officials later flew to Singapore yesterday to brief a group of foreign banks associated with its national debt crisis. Sources in Singapore said the meeting took place at the Union Bank of Switzerland’s offices.

The announcement on the private sector’s outstanding loans raised fears about the government’s own debt, and ratings agency Standard and Poor’s moved quickly to cut Indonesia’s government debt ratings.

“The downgrades are based on Indonesia’s deepening financial crisis and diminished external payments flexibility, as evidenced by the government’s suspension of foreign currency debt servicing by troubled corporates,” S&P said in a statement.

Earlier, Mr Mar’ie said that to attract overseas capital in the nearly crippled banking sector, the government would lift all restrictions on foreign ownership of banks.

He said that such “immediate and decisive action” was necessary because of a loss of confidence in the banking system.

Depositors had withdrawn their money from banks, he said, adding that this reduced the amount banks could lend companies. Foreign banks were also increasingly reluctant to accept Indonesian letters of credit, making it difficult for the country to obtain vital imports.

“Accordingly, the government has decided that from today it will stand behind the commercial banks of the country and guarantee that obligations to depositors and creditors will be met. This means that the public can now be assured their deposits are completely safe and sound.”

He said that the bank guarantee applied to claims in both rupiah and foreign currencies. But foreign currency claims would be paid out in rupiah at prevailing market rates.

The pledge, which would remain in place for at least two years, did not apply to shareholdings and subordinated debt, he added.

He stressed, however, that this alone would not solve the underlying problems of the banking sector and a government agency would be set up for this purpose.

He said that the new body, called the Indonesian Bank Restructuring Agency (Ibra) and headed by senior Finance Ministry official Bambang Subiyanto, would advise banks in “financial distress”. It can also take over and restructure their operations or form mergers.

The announcement of the measures was the latest move by the government to follow through on its IMF commitments for economic reform in return for a US$43 billion (S$75.2 billion) bail-out package.

The local bourse surged 2.2 per cent on the announcement, with the Jakarta Stock Exchange composite index rising to 484.008 points in the opening minutes of trade yesterday. Analysts contacted by The Straits Times wondered whether the government had sufficient financial resources to back troubled banks.

Said one analyst: “The whole idea is to instill confidence. If the banking system does not regain that and more people start pulling out money, then the government will have to keep putting in cash to ensure the banks stay solvent.”