June 11, 1999
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| June 11, 1999 | atimes.com | |
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| Southeast Asia Indonesia in world's worst banking crisis since '70s: S&P (Full text of a statement from Standard & Poor's:) JAKARTA, June 10 Asia Pulse - Indonesia is suffering the world's worst banking crisis since the 1970s, when measured on a fiscal cost-to-gross GDP basis, and may take up to a decade to fully recover. Standard & Poor's estimates that Indonesia's crisis will consume an up-front fiscal cost, defined as funds provided by the government to initially recapitalise or pay out creditors ot distressed banks, equivalent to $87 billion or 82 percent of GDP. This figure, which is 24 percent higher than the Indonesian government's own estimate, places the cost of Indonesia's banking crisis among the highest of financial crises transpiring in the past two decades. An expectation that the Indonesian banking sector's non-performing loans-to-total loans will reach about 75-85 percent by the end of 1999 supports the view that the recovery of Indonesia's banking sector, back to its pre-crisis position, will be protracted. Indonesia's banking predicament ranks worse than the current crises of Thailand (1997-present), South Korea (1997-present) and Malaysia (1997-present), which Standard & Poor's estimates will cost 35 percent of GDP, 29 percent and 22 percent, respectively. Contributing to the high relative cost of Indonesia's crisis is the country's small-to-midsize economy (GDP of $lO7 billion) which, although two-fifths larger than that of Malaysia, is only four-fifths the size of Thailand's, and one-third of South Korea's. A further contributor to the severity of Indonesia's crisis is the pivotal economic role played by domestic banking given the underdeveloped local equity and debt markets. The Indonesian government's estimate of the up-front fiscal cost is $7O billion, or Indonesian rupiah (Rp) 570 trillion. This consists of Rp352 trillion in bank recapitalisation injection and Rp218 trillion of reimbursements to the central bank. Based on a conservative 70 percent loan loss provisioning level, the government's proposal to inject a total Rp352 trillion of capital into state and private-sector banks implies that nonpertorming loans may reach 75-85 percent of total loans by the end of 1999. Standard & Poor's estimates that the fiscal cost to rescue the banking sector is 24 percent higher than the government's estimate. It includes additional costs tor three years' interest expense of Rp115 trillion on government bonds being issued for the recapitalization, and a further contribution of Rp22 trillion in supplementary equity needed to bring domestic banks' capital levels up to minimum international standards. The Indonesian banking sector's recovery process is likely to be protracted. Negative interest spreads, a lack of substantial new bank capital from private-sector sources, an unclear legal environment for debt recovery and the sheer magnitude of the government's task to rebuild an entire banking industry are obstacles to a speedy recovery. In spite of the government's hopes, it remains difficult for the authorities to lower interest rates sufficiently in the near term to enable banks to again earn a positive spread on loans without unduly endangering the rupiah's exchange rate. Banks are expected to continue incurring losses in 1999, which will erode the benefits of proposed new capital injected by the government. (Asia Pulse) | |||||||||
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