Friday, November 25, 2005

Phasing out recapitalization bonds

Yesterday I chaired a panel discussion with highly-respected speakers on Indonesia Economy Outook organized by Bisnis Indonesia newspaper.
Senior Deputy Governor of Bank Indonesia (Central Bank) Miranda S. Gultom said the economy would slow-down in first half, but could improve later of the year. Inflation would still double-digit until third quarter and ease to single digit by fourth quarter at around 8% to 9%. Benchmark rates would be around the inflation level. Rupiah is predicted to remain weak for the thre quarters and strengten by fourt quarter. Economic growth target of 6%, she said, would be reached with extraordinary efforts. Overall, I would say, Central Bank cautiously optimistic on Indonesian economy outlook for 2006.
Bambang Trisulo, chairman of Indonesian Automotive Industry Association, projected car sales could drop to 450,000 units next year, far below the 2005 figure at around 530,000 units. Meanwhile, Lukman Purnomosidhi, chairman of Real Estate Association, predicted property slow-down next year but could still cope with increasing interest rates.
Oil observer Kurtubi predicts oil price would hovering around US$65 per barrel next year while Indonesia increasingly rely on imported fuels due to declining domestic production. In his view, Indonesia's economy still vulnerable on the global oil price fluctuation. But, no need for another fuel price hike next year. The problem is, state-owned electricity company PT Perusahaan Listrik Negara (PLN) had announced the possibility of tariff hike of 30% starting early 2006.
But these are standard estimation. The audience were lucky to have Dr Rizal Ramli, former minister of finance and chief economic minister under Abdurrahman Wahid administration. While criticizing government's policies, he proposed two important and unconventional ways of macro-economy management.
First, significant cut on sovereign loan. Indonesia, he said, should take all diplomatic ways to reduce the debt payment and pump the funds into the economy in a bid to balance the slowing domestic consumption due to reduced purchasing power. Indonesia shouldn't keep its Good Boy Approach. Look at Argentina and Nigeria.
Second, significant cut on recapitalization bond interests subsidy through phasing out the interest payment. FYI, each year state budget allocates US$6 billion in interests subsidy at the expense of ordinary citizen in lower fuel subsidy. This is the result of bank recapitalization program in 1998-2001 in which government tookover bad loans and exchanged them with interest-beare recapitalization bonds of around US$60 billion. Most of the bonds mature in 2007-2020.
As I missed the detail of Dr Ramli's proposition, I asked him how such scheme would work without shaking the recapitalized banks. I understand that it is not fair to subsidy these already profit-making banks (some had started to pay dividends to shareholders). "But we could do it gradually," he said. His main thesis is that if government had the guts in phasing out fuel subsidy, why don't do the same on bond interest subsidy?
I tried to look at how it might affect Indonesian bank. Take Bank Mandiri, the largest bank in Indonesia, as an example. The bank was recapitalized with Rp178 trillion or US$18 billion of government bonds. With interest rate of 10% per year, government, through the State Budget, should pay (subsidy) Bank Mandiri US$1.8 billion per year. But according to the bank's June 2005 balance sheet, the amount of government recapitalization bonds were Rp92.2 trillion (US$9.2 billion), meaning The State Budget should pay interests to Mandiri at least Rp9 trillion per year. It could be half of Mandiri's total interests income. For sure, Mandiri would collapse if government decides to stop paying the interest.
Look at BNI, the second largest state-owned bank. The bank has Rp35.6 trillion (US$3.5 billion) of government recapitalization bonds in its assets with interest income roughly at Rp3.5 trillion per year.
The problem is most banks had sold parts of government bonds to fund managers and investors. How we should deal with that?

Labels: , , , ,



Post a Comment

<< Home