| President Suharto | ||||||
Few in the financial sector would doubt the benefits of having an independent central bank, where governors are free from interference or threats and responsible for targeting inflation, controlling money supply and interest rates and supervising the sector, without needing to heed advice from political masters.
But what happens if the governor of the bank is suspected of financial fraud and is placed under house arrest pending trial? Or if the central bank is found to be missing $15 billion due to improper disbursement and faces liquidation? Or if the local parliament, the only body which can rewrite the law to replace the governor, refuses to go along with presidential pleas to do so? Such is the situation in Indonesia.
The imbroglio dates from 1997, when the central bank, under a different governor, disbursed at the behest of a committee of economists and ministers led by disgraced former President Suharto, a total of Rp134 trillion ($14.2 billion) to banks which claimed they were suffering a run.
Most of the money, worth more than $30 billion at the time but now valued at less than half that due to the further depreciation of the local currency, was misused, according to the state audit agency. Bank and conglomerate owners used it to pay oV foreign debt, purchase assets offshore, or simply salted it away in foreign accounts. The funds have been deemed irrecoverable.
Soon after they were disbursed, President Suharto fell from power. Former President Habibe, his successor, rushed the new independent central bank law through parliament, but without appointing a new board for Bank Indonesia. Under the law the central bank governors cannot be replaced unless they are proven guilty of a criminal offence, become incapacitated, or voluntarily step down. A year later, the governor, Sjahril Sabirin, was charged with involvement in the Bank Bali scandal after he repeatedly refused requests from democratically elected new leader, Abdurrahman Wahid, to step down.
The Bank Bali scandal, in which more than $58 million was extracted from one of Indonesia’s better banks and used for party political purposes, was a major reason for the failure by Habibie to get re-elected last year. But trials of two men so far charged with involvement in the scandal have resulted in acquittal, casting further doubt on the ability of Indonesia’s legal system to root out and punish corrupt officials.
Wahid has been successful in keeping the central bank going as a functional body by his appointment of Anwar Nasution, a respected economist, as acting governor. Nasution, who had earlier described the bank as “a den of thieves” resigned with several colleagues in November in an effort to clear the way for new appointments. But although he will stay on temporarily – and may well be appointed governor when the parliament amends the law – he is still unable to launch the cleansing that BI’s stables so clearly need.
“The bank staff are demoralized, since there’s no leadership,” says Nicholas Cashmore, head of research at CLSA Securities. “But fortunately there’s very little to supervise at the moment, as the banks are recapitalized with government bonds, and have not yet developed big new loan portfolios.”
The scandal hasn’t yet had an effect on Indonesia’s banking sector, now in recovery mode since recapitalization was completed recently. For the first nine months of the year, most major banks were able to report a return to profitability.
State-owned Bank Mandiri led the way with a net profit of Rp1.1 trillion, while recently privatized Bank Central Asia’s earnings came in at Rp851.9 billion. Bank Negara Indonesia (Bank BNI) is still struggling with a Rp1 trillion loss in the first nine months but that compares with Rp4.6 trillion in losses last year.
The banks are currently living mainly off the income from the government bonds. But an improved economy is boosting retail lending for cars and motorcycles and home buying. Corporate lending remains in the doldrums as restructuring of big companies is proceeding only slowly and trade financing is still the province of foreign banks as Indonesian bank LCs are not yet acceptable abroad.
The banks will, however, be able to retire some bonds later this year as a flow of restructured loans starts to come through from Indonesian Bank Restructuring Agency, the body charged with cleaning up the loan mess. Loans worth Rp8 trillion will be auctioned in December following an earlier purchase of Rp3 trillion in loans by Bank Danamon.
Analysts believe that the rush by the recapitalized banks to boost new lending could create problems later. “Spreads are very narrow at the state banks and you have to ask about the quality of some of these new borrowers,” says Tony Sandhu, head of research at HSBC Securities. “They could also price the better run private banks like Bank Panin and Bank NISP out of the market.”
While the slow return to health is not yet reflected in stock prices, the outlook for the sector is steadily improving. Bank Mandiri has announced plans to seek a public listing in 2001 and is currently appointing advisors. The government will sell a further stake in Bank BCA early next year and also plans to float Bank Niaga, a smaller formerly private institution. More mergers of small banks are on the cards.
But as the banks start returning to normal, the effect of the problems at Bank Indonesia will become even more acute if they are not resolved. Poor banking supervision, especially of connected lending, was at the root of the 1997 crisis, most analysts believe.
The finance and economic committee, blamed for the loss of funds from Bank Indonesia, included no less than nine current or former Wnance ministers or central bank governors, along with three of Indonesia’s top businessmen and two former chiefs of IBRA. But the crisis spawned such chaos and panic in the Indonesian financial system, that it is unclear whether all members of the committee could have detected the fraud.
Suspicion has also fallen upon senior central bank officials, who are believed to have colluded with bank owners. The need to install honest and competent leadership at the central bank and to make proper supervisory arrangements is thus critical to Indonesia’s financial future. If the central bank issue is fudged, it could only be a matter of time before Indonesia faces a rerun of the crisis, for exactly the same fundamental reasons.
