Indonesia's banking sector, deep in crisis since
1998, is finally beginning to recover. The sale last month by
the government of one of the biggest banks nationalized after
the sector's collapse, and a further successful international
bond sale by the biggest state bank, has improved investor
sentiment, prompting optimism about further privatizations
still in the pipeline.
The optimism reflects growth in confidence about the broad
stability of the macroeconomy. This has shown significant
improvement across most indicators over the past year, including a
strengthening currency, reduced inflation and debt, continuing
growth of around 4% and a stable export performance. Only incoming
foreign investment lags, still dogged by fears about corruption and
a dysfunctional legal system.
Worries about political risk have diminished following
Indonesia's crackdown on terrorism in the wake of the Bali bombing
last year, and its comparatively muted opposition to the war in
Iraq.
Brightening foreign investment
prospects
The success of the sale of Bank Danamon has boosted prospects on
the foreign investment front, which had been blighted by fears of a
nationalist backlash similar to the one that accompanied the sale
of telecommunications operator PT Indosat late last year. Both were
sold to companies controlled by the Singapore government. But
though the first created a short-lived uproar, the second has
proceeded so far with little comment.
The majority 51% stake in Bank Danamon was sold by the
Indonesian Bank Restructuring Agency (Ibra), the government body
set up to dispose of companies and banks acquired after the 1998
collapse. It raised $347 million and a further 20% of the shares
are being sold to the public through the market, with the first
tranche doing well. The winning bid came from Asia Financial
Indonesia in which Temasek Holdings, the Singapore state-owned
investment company, holds 85%, in partnership with Germany's
Deutsche Bank, with 15%.
The bid was well received, with analysts noting that Deutsche
has an excellent track record in Indonesia through its involvement
as adviser in the creation of Bank Mandiri, now the biggest state
bank. Mandiri emerged from a substantial restructuring, involving
the fusion of four distressed state banks that had been severely
injured by the crisis.
Bank Danamon is the third bank Ibra has sold through the
strategic sale mechanism. A 51% stake in Bank Central Asia, the
largest retail bank, was sold to Farallon Capital Management of the
US in March 2002, and a similar controlling stake in Bank Niaga
went to Commerce Asset Bank of Malaysia late last year.
The Danamon sale won praise from the IMF, which is still
monitoring Indonesia's progress, but also a warning. "Strengthening
the financial sector is a central element of the programme," says
Anne Krueger, the IMF's first deputy managing director. "With the
launch of the sale of Bank Danamon, further progress continues to
be made toward the goal of returning to private ownership banks
that were taken over during the crisis. But further steps are
required to strengthen the monitoring, governance, and
accountability of state banks as they are prepared for
divestment."
The next planned sell-off is Bank Lippo, in which Ibra has a 59%
holding. Two other banks remain under Ibra control. One is Bank
Internasional Indonesia - formerly owned by the Sinar Mas group -
whose pulp and paper company APP is the subject of debt
restructuring negotiations with foreign creditors. The other is
Bank Permata, the result of a merger of five banks, including the
ill-fated Bank Bali, whose sale in 1999 to Standard Chartered Bank
collapsed in a welter of political controversy and legal action and
led to the departure from office of former Indonesian president BJ
Habibie. Danamon is one of the many banks trying to access the
retail lending and small and medium-size company sector following
the collapse of the big conglomerates that were the mainstay of big
Indonesian banks during the 1990s. Recapitalized with government
bonds and merged with seven small banks in 2000, it has 465
branches and 700 ATMs but only 1.8 million customers after culling
inactive accounts, compared with competitor BCA's 7 million.
Nevertheless it has increased its loan to deposit ratio to 50%
following a 75% increase in loans last year and further growth of
more than 50% is forecast this year.
Such rapid growth brings risks. Danamon is targeting a maximum
5% non-performing loan ratio, which might be difficult to meet. Its
cost of funding is also higher than BCA's, with 65% in time
deposits paying around 13% interest. Profits rose 31% to Rp948
billion ($116 million) last year. Investor interest in the bank
awaits the sale of the further Ibra tranches to raise its free
float to 20%.
Despite the recent smooth progress, it seems unlikely that Ibra
will find the planned sale of Lippo Bank later in the year so easy.
The bank, founded by the Riady family, which maintained close
relations with former US President Bill Clinton and has a financial
empire that extends from Jakarta to Hong Kong, China and the US,
has scarcely been out of the press for months. It was the subject
of three separate inquiries by ministries and regulators, has had
its board of directors replaced and has been fined hundreds of
thousands of dollars for offences whose precise nature has not been
disclosed. This has hugely embarrassed Ibra, which has a majority
stake in Lippo and is supposed to be controlling it.
The saga began late last year when Lippo published a set of
audited results. A few weeks later it published a further set of
unaudited results indicating that the value of its assets had
collapsed. This caused its share price to crash: suspicion grew
that people with a vested interest in the bank might be attempting
to acquire shares on the cheap, preparatory to the sale of the
government stake later.
The explanation was more prosaic: the first set of accounts
valued the assets (mainly properties the bank had acquired when it
foreclosed on bad loans) as long-term income earners. But Ibra had
instructed Lippo to sell off these properties before the bank's
sale - so their value was naturally much lower in the second set of
accounts since they would be disposed of in a fire sale.