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Indonesia's c.bank woes threaten revival

JAKARTA: Indonesia's hopes for its first prosperous new year in a long time are likely to be dashed, with investors keeping their distance, unless the government moves fast to sort out its crisis-hit central bank.

A government audit shows Bank Indonesia finances are now so precarious that it needs urgent recapitalisation and President Abdurrahman Wahid has already suggested governor Sjahril Sabirin be sacked.

"Expectations of economic recovery and the return of (foreign) funds are the main story this year," ING Barings head of research Laksono Widodo said.

"But if the problem drags on it's not impossible the funds will delay their return," he added.

Lack of confidence in the central bank could also damage credibility and harm debt negotiations with creditors.

Some economists fear that the damning findings by the Supreme Audit Agency (BPK), which presented its report to parliament on New Year's Eve, could be just scratching the surface.

DEEPER PROBE NEEDED

Economic analysts said further probes into the bank's finances are vital, warning that the BPK indicates deeper and more complicated problems could be uncovered.

"It's not surprising that the bank is technically bankrupt," said Sri Mulyani Indrawati, University of Indonesia's economist and key economic adviser to the president.

"The bank lent more than it could afford. Bankruptcy could be expected," she said.

ING's Widodo said the cost of bailing out Bank Indonesia could be much higher than expected.

The publication of the audit has sparked a flurry of accusations, charging the central bank with incompetence or worse.

At issue are the trillions of rupiah -- some reports have put it at 51 trillion ($7 billion) -- the central bank extended in so-called liquidity credits to help out commercial banks at the height of Indonesia's financial crisis in 1997 and 1998.

Few of the banks are able to repay the money.

The government plans to issue bonds to help recapitalise the central bank. The move is backed by the International Monetary Fund which is leading a roughly $45 billion international package to pull Indonesia out of prolonged recession.

The IMF and the government are also working on a plan to rejuvenate the bank.

INJECTION ADDS TO BUDGET BURDEN

Economists said the injection of fresh capital could be an additional burden to the state budget, already weighed down by the cost of bailing out commercial banks.

Central bank officials deny accusations of mismanagement, saying the loans were emergency help to keep a failing banking system afloat.

"In such an emergency, proper credit analysis might not have been fully applicable," said University of Indonesia economist Mohammad Ikham.

"But looking at the size of the loans, and how the Bank was under heavy influence of the old regime, such thing could happen. That's why further investigation is a must," he added.

The revelations of Indonesia's latest financial crisis come just as its financial markets are gearing up for an influx of funds to match their own optimistic forecasts for growth in an economy severely battered by its worst recession in more than 30 years.

So far the markets have taken the news in their stride, but market analysts worry that sentiment could reverse quickly if the government is slow to resolve the problem.

DAMAGE TO DEBT NEGOTIATIONS

Takahira Ogawa, sovereign ratings director at Standard and Poor's, said he was concerned the central bank issue could get in the way of negotiations at meetings with Indonesia's donors.

The Paris Club and the Consultative Group for Indonesia (CGI) meetings are scheduled for late January or early February.

According to S&P, gross government debt has reached 110 percent of gross domestic product, a dramatic increase from just 26 percent three years ago.

Scheduled principal repayments on public external debt are meantime expected to rise to $5 billion in 2000.

S&P rated long-term foreign currency issuer credit and senior unsecured debt ratings on Indonesia's $2.3 billion of commercial debt a triple 'C'-plus, indicating a high risk of default.

"The government has to disclose the true picture of Bank Indonesia's account...to disclose this to the nation so that the credibility of the government can be maintained," Ogawa said.-Reuters