The outlook for Indonesia's banking sector is in the stable to positive range, but its recovery is hampered by erratic legal decisions and political instability, Moody's Investors Service said Tuesday.
In a statement received here, Moody's rated the future recovery of the country's banking system, which collapsed under the onslaught of the Asian financial crisis, at an average of Caa2, but said it was institution-specific.
The main stumbling block was the huge bank recapitalization costs "which remains a political issue and makes the banking sector's credit worth highly dependent on political stability."
In addition, Moody's said, poor investor sentiment — which had "not been improved by erratic legal judgements that slow the resolution of the corporate sector's outstanding debt — continued to constrain the banks' ability to raise capital.
"This situation now contributes to the fact that the financial flexibility of the recapitalized banks is marginal and that the financial condition of many is still impaired," it said.
But despite the political dangers and obstacles, "the government's wider consensus on banking sector policy has allowed the government's bank recapitalization program to proceed steadily."
Also on the plus side, intensive restructuring efforts have been made at a number of banks as they attempt to move closer to international best practices, "especially in the area of risk management," it said.
The "most important catalyst for change" was likely to be foreign ownership through liberalization and future capital raising efforts, Moody's said, but added that "the failure of Indonesia's first bank sale to a foreign institution had demonstrated some of the difficulties involved."
The greater part of the Indonesian banking system — weighed down by illiquid government bonds — remained unable to provide the funding needed to support the country's nascent economic recovery.
Capital constraints and a continuing balance of largely unrecoverable loans compounded the problem, it said.
Under the costly $60 billion plus bank restructuring program, the government has taken over 49 banks, closed others and issued bonds to fund the restructuring. — (AFP)
© Agence France Presse 2000
© 2000 Mena Report (www.menareport.com)
