BANKING: Indonesia's bankrupt tycoons
Far Eastern Economic Review
Nov 19, 1998

No Miracle Cure:

Indonesian agency for sick banks gets a shot in the arm

By Salil Tripathi and Dan Murphy in Jakarta
1419 Words

As the muezzin's call pierced the Jakarta sky at dawn on November 6, a
band of exhausted officials from the Indonesian Bank Restructuring
Agency scored a small victory in its ongoing struggle to nurse the
country's sick banking system back to health. After hours of gruelling
negotiations, President B.J. Habibie promised measures that Ibra
believes will enhance its autonomy, thus better insulating it against
politicians trying to subvert its efforts. "It has been a massive
battle," says a relieved senior Ibra official. "For a while, we had
thought it was all over."

  Habibie not only agreed to extend Ibra's life by four years, but also
gave responsibility for ratifying the agency's decisions to one of its
strongest supporters, Finance Minister Bambang Subianto. The agency has
merely won a battle, however, not the war. While the recent measures
provide a welcome boost to Ibra, its officials want a clearer mandate
from Habibie. Without it, they fear the agency will remain susceptible
to powerful political adversaries.

Indonesia cannot afford to have Ibra fail: Economic recovery in the
near-term depends upon a robust banking system. Towards that end, it is
critical for Ibra to be sturdy enough to separate bad banks from the
good, close those that aren't worth recapitalizing, and provide credit
to those that can survive. That means it must be able to withstand
pressure from bank owners whose assets Ibra has targeted to help settle
their banks' own borrowings. A strong Ibra would also be better equipped
to stave off attempts to use it to transfer Chinese-Indonesian assets to
pribumi (indigenous) businesses.

  One of the earliest bank-restructuring authorities set up by the
International Monetary Fund amid Asia's financial turmoil, Ibra is "the
basic tool with which Indonesia can fix its banks," says Brian O'Connor,
a director at Lehman Brothers which negotiates with failed banks on the
agency's behalf. Lehman Brothers estimates that bad debt accounts for
61% of total loans in Indonesia, or $36 billion. Recapitalizing the
banks will cost between $17 billion -- or 31% of gross domestic product
-- and $40 billion, making the Indonesian banking crisis among the most
acute in Asia.

  To help Ibra do its job, analysts say Habibie should give the agency
the authority through legislation to, among other things, conduct
negotiations autonomously on the foreclosure of bank-owners' assets and
to sign final settlements with them on resolving their banks' debt. Ibra
should also have the power to prosecute bank owners who are reluctant to
repay their banks' debts -- without the permission of the
attorney-general. "Ibra needs to be its own master," says Kwik Kian Gie,
a respected economist in Jakarta who advises opposition politician
Megawati Sukarnoputri. Ibra says it has a verbal commitment from the
president that these powers will be formalized soon, but many remain
sceptical that will happen. (Despite repeated requests, Ibra Chairman
Glenn Yusuf wasn't available for an interview with the REVIEW.)

  Political backing for Ibra has been weak because the agency threatens
the business groups which for decades have enjoyed a cozy relationship
with politicians. Indeed, although Suharto has gone, the former
president continues to cast a long shadow -- Habibie and many in the
current cabinet worked with him during his 32-year rule. For Ibra,
cleaning up many of the banks, particularly the messier state-owned
ones, will involve calling in bad loans made to Suharto's family and
associates. Bankers in Jakarta say these loans have either been repaid
only partially or not at all. "The secrets are buried deep, and it is in
the interests of the current establishment not to make those secrets
public," says Wilson Nababan, president-director of Cisi Raya Utama, a
consultancy that evaluates corporate creditworthiness.

  Rizal Ramli, an independent economist in Jakarta, adds that political
opposition to Ibra is inevitable because Indonesia has never had an
independent institution to investigate those in authority. "Those who
were part of the Suharto regime are uncomfortable with Ibra," he says.
Such resistance has hamstrung the agency: In its 10 months of existence,
it has taken over, closed or suspended only 14 out of 212 banks, and its
involvement in 40 other weak financial institutions is limited to
providing them emergency credit. Indeed, Ibra has only just started to
address the more problematic state banks, which in general have been
managed worse than their private counterparts. Most of Ibra's effort
thus far has been on five troubled private banks: Bank Central Asia,
Bank Dagang Nasional Indonesia, Bank Danamon, Bank Umum Nasional and
Bank Surya. In a bid to turn the institutions around, Ibra has taken
them over and targeted their owners' assets to repay the banks' debt.

  Their owners have agreed to repay a total of 96.5 trillion rupiah
($11.5 billion), but the settlements were not to Habibie's liking --
creditor Bank Indonesia, the central bank, has recovered only 1 trillion
rupiah in cash; the rest is in shares. The president wants cash because
shares given as repayment are seldom from listed companies, raising
questions about their valuations; in any event, the Indonesian
stockmarket remains sluggish.

  Certainly, says an Ibra official, Ibra needs more clout to take on
influential politicians and businessmen such as Mohamad "Bob" Hasan, a
prominent Suharto crony who tentatively agreed on November 6 to repay a
multitrillion-rupiah debt racked up by Bank Umum Nasional, which he
partly owns. Since neither the president nor Finance Minister Subianto
has ratified the deal, there could be leeway for Hasan to wriggle out of
it. A leading Indonesian banker adds that the tentative settlement has
come about only after Hasan repeatedly postponed the negotiations, much
to the irritation of Ibra, which tried unsuccessfully to obtain
Habibie's go-ahead to prosecute Hasan for not meeting a September 21
deadline to make good his bank's debt. Says a frustrated senior Ibra
official: "If we can't go after people like Bob Hasan, then there might
as well not be an Ibra."

  Habibie had planned the seizure and sale of big-business assets
within a year to quickly build up Bank Indonesia's capital. A healthy
central bank would be able to provide the government much-needed
liquidity: The Indonesian budget this year will suffer a shortfall of
8.5% of GDP, as permitted by the IMF. At the fund's insistence, however,
Habibie agreed on November 6 to extend the schedule for sale by four
years. The revised time-frame will enable a more orderly disposal, which
in turn should help Ibra not only to obtain the best value for the
assets, but also to resist pressure to redistribute the assets of the
ethnic Chinese to pribumi interests.

  Ibra officials insist they haven't targeted Indonesia's Chinese; but
as they own most domestic banks, the Chinese are likely to be affected
the most by the agency's cleaning-up. True, the four main banks Ibra has
targeted are all Chinese-owned. But as O'Connor of Lehman Brothers
pointed out in an October interview, their loan-violations were also the
most severe. "The criteria were applied meticulously to remove the
impression of unevenness," says a senior Washington-based IMF official
close to Ibra.

  One Chinese-Indonesian banker doesn't agree. "Ibra is the tool with
which Habibie wants to transfer assets from us to his followers," he
says. Certainly the president has been under pressure for affirmative
action from members of his cabinet: Ginandjar Kartasasmita, his senior
economics minister, and Adi Sasono, minister of cooperatives. An
important Habibie aide, Sasono had advocated the one-year schedule for
selling assets -- in full, for cash. Analysts say it would be highly
unlikely for a buyer to meet such stringent conditions, thus enabling
the government to then push for a transfer of assets from the Chinese
debtor to a pribumi firm once 12 months were up.

  The possibility of taking over lucrative concerns from
Chinese-Indonesian firms excites some pribumis. In early November,
Hariyadi Sukamdani, chairman of the Indonesian Association of Young
Businessmen, said members would like to claim some of the assets but
didn't specify payment. The association has close links with Kadin, the
Indonesian Chamber of Commerce and Industry run by Aburizal Bakrie, a
leading pribumi businessman who also advocates "a more equitable
distribution of wealth." For his part, Iman Taufik, a senior Kadin
official, has urged Jakarta to transfer seized assets to Kadin members
"to protect their value," implying that pribumi businessmen will do a
better job than Ibra in managing the assets.

  Such posturing surprises some senior Ibra officials and international
bankers. Says an IMF official: "Redistributing wealth is not part of
Ibra's agenda; its goal is to maximize the value for the
asset-management company."