Bad rap for Jakarta banks - Indonesia - ST

Business Asia, June 28, 1999

Crisis `worst' since 1970s

Indonesia's banking crisis is the world's worst since the 1970s and may take up to a decade to recover, the latest Standard and Poor's figures have found.

Standard and Poor's estimates that Indonesia's crisis will consume an up-front fiscal cost of US$87 billion, or 82 per cent of Indonesian gross domestic product (GDP), the worst in two decades.

Up-front fiscal costs are defined as funds provided by the government to initially recapitalise or pay out creditors of distressed banks.

The US$87 billion estimate, which is 24 per cent higher than the Indonesian government's own estimates, places the cost of the banking crisis as worse than the current crises of Thailand, South Korea and Malaysia.

Standard and Poor's estimates Thailand's crisis will cost 35 per cent of its GDP, South Korea's 29 per cent and Malaysia's 22 per cent.

The group, in a statement released this month, said Indonesia's small-to-midsize economy of about US$107 billion was one of the main contributors to the high relative cost of the crisis.

This was because although its GDP is two-fifths larger than Malaysia, Indonesia's GDP is only four-fifths the size of Thailand and one-third the size of Korea's.

Another contributor was the pivotal economic role played by domestic banking in the country's underdeveloped local equity and debt markets.

The Indonesian government's estimate of the up-front fiscal cost is 570 trillion rupiah (US$70 billion), which consists of 352 trillion in bank recapitalisation and 218 trillion rupiah worth of reimbursements to the central bank.

Standard and Poor's estimates that Indonesia's banking sector's non-performing loans will reach 75 to 85 per cent by the end of the year, making the recovery process protracted.

The company said negative interest spreads, a lack of substantial new bank capital from private sector resources, an unclear legal environment for debt recovery and the sheer magnitude of the government's task to rebuild an entire banking industry were other major obstacles to a speedy recovery.

It projected Indonesian banks would continue incurring losses in 1999, eroding the benefits of proposed new capital injected by the government.