Indonesia: New ownership rules to foster competition
Foreign investment ‘not discouraged’; DBS-Danamon deal sets precedent
New ownership caps introduced by Indonesia’s central bank are pre-emptive controls to prevent a build-up of systemic risk and not protectionist measures introduced by the Indonesian government, according to analysts.
Bank Indonesia’s (BI) new regulations – against a backdrop of vibrant growth in the Indonesian economy – apply to foreigners and Indonesians alike, and therefore often-voiced worries about protectionism and nationalism by Indonesia appear to be unfounded.
"The rationale behind this is that the Indonesian central bank wants to prevent systemic risk by ensuring that foreign-owned banks are well regulated and funded in times of economic stress and that the government will not have to come in and bail them out," says an Indonesia-based analyst.
State-owned banks, closely monitored by the government, will be exempt from the new regulations.
The new regulations say single financial institutions are limited to buying a 40% stake in an Indonesian bank. Non-financial institutions can buy up to 30%, whereas families and individual investors can acquire up to only 20%. Previously, investors were able to buy stakes of up to 99% in an Indonesian commercial bank, making Indonesia one of the most open economies to international investment globally.
"Even though the ownership cap is fixed at 40% for financial institutions, the central bank can overlook this in favour of a strong international investor with good fundamentals and long-term interest in the country," says Alfred Chan, director of financial institutions at Fitch Ratings in Singapore. "The new regulations appear to provide some flexibility, and we don’t know how they will be implemented in practice as yet."
|Shweta Singh, economist at Lombard Street Research in London|
Euromoney sources agree that the new regulations are not intended to discourage serious international investment in Indonesia but, as Shweta Singh, economist at Lombard Street Research in London, highlights, there will be some negative consequences as a result. "[New rules] may reduce the pace of foreign entrants in the near term because of additional layers of regulations and uncertainty regarding some provisions," she says. Moreover, misconceptions surrounding the new regulations might have already created a negative sentiment for those wishing to invest in Indonesia, says Anton Gunawan, chief economist at Bank Danamon in Indonesia. "One of the reasons for this is that the government and central bank in Indonesia have relatively weak public relations and the way in which information is released can often be misconstrued," says Gunawan. "This is what is slightly worrying."
Talks surrounding the acquisition of Bank Danamon, Indonesia’s fifth-largest bank, by Singapore’s DBS Group for S$9.1 billion ($7.3 billion) – which began in April – were put on hold after the central bank’s commitment to new ownership regulations.
They have now resumed and if the acquisition is completed, the deal will set the benchmark for other acquisitions. "DBS will try to apply for the exemptions that will allow them to have more than a 50% stake in Bank Danamon," says the Indonesia-based analyst. "If it is approved, they are likely to go ahead with the acquisition, given the potential long-term growth of the Indonesian economy."
The deal would value Danamon at 2.6 times book value as of April. The takeover would give DBS a 3,000-branch network of 6 million customers, more than the population of Singapore, along with access to southeast Asia’s largest economy.
In December and January, Fitch and Moody’s respectively upgraded the sovereign to investment grade, boosting its status as an ever more popular investment destination.
According to Gunawan, the main targets of the regulation changes are family-owned banks, which usually have a lot of problems with corporate governance. "Bank failures in Indonesia have been linked to fraud in family-run banks," he says. "This is why BI chose to link ownership limitation with good corporate governance."
Indonesia’s Bank Century was one such establishment riven by accusations of fraud and embezzlement in the 2000s, which resulted in the arrest of Robert Tantular, its co-owner, in 2008. At the time, the bank was bailed out by the government with Rp6.76 trillion ($677.4 million), four times more than the amount initially approved by parliament after management declared the bank was insolvent.