The Future of State-Owned Financial Institutions

9. Lessons from Indonesia

 Lessons from Indonesia 9 I - enterprises are major actors in national economic development. The activities managed by these enterprises cover almost all sectors in Indonesia, and almost all people must deal with them in one way or another. The economic crisis in Indonesia in 1997–98 caused the financial performance of many state-owned enterprises with a strong position in the national economy to severely drop, with a lessening of the contribution of these enterprises to the country’s revenue. As an illustration, the contribution (taxes and dividends) of fourteen of the top state-owned enterprises in 2000 was only Rp 13.6 trillion, while total government revenue was Rp 187 trillion.1 Thus the contribution of these enterprises to government revenue was only 7.3 percent. Several experts believe that the crisis in Indonesia stemmed mainly from the cumulative results of weaknesses in the banking institutional framework: —Unseparated functions among owners, regulators, management, and supervisors —The lack of good corporate governance (risk management, transparency, accountability, and compliance) —The dominance of state-owned banks, the number of new banks, and the minority role of the capital market in these banks.     1. Sukardi (2002). 09-1335-5-CH 09 12/9/04 3:37 PM Page 229 The crisis saw banks’ capital adequacy ratio fall below zero and the ratio of highperformance loans to third-party liabilities dramatically decrease. Therefore, when the crisis hit it inevitably led to a deterioration of Indonesia’s banking infrastructure. The crisis affected most business people, especially those whose business involves imports. Many corporate-scale companies went stagnant, most of them declaring bankruptcy because of the sudden increase of debt brought on by the fall of the Indonesian rupiah against the U.S. dollar and the weakness of domestic demand. These two factors increased Indonesia’s level of country risk, leading to the deterioration of banks’ management and asset quality. However, if state-owned enterprises are managed professionally, they can be productive, profitable, and even worldwide actors. Of thirty-seven sectors involving 161 state-owned companies, 124 of these companies (or 77 percent) are competitive , and only 11 companies (or 7 percent) are monopolistic.2 Sectors that have the potential to become worldwide actors are financial services, agroindustry, consumer goods, energy, tourism, telecommunication and media, and mining.3 Government Recovery Efforts Since the beginning of the crisis, the government has worked hard to improve its banking sector. On January 27, 1998, the Indonesian Bank Restructuring Agency (IBRA) was created to take over the claims deriving from Bank Indonesia’s facilities and to replace them with government bonds. The Jakarta Initiative Task Force assisted IBRA in restructuring most of the private sector’s debt. The liquidity of Bank Indonesia was underwritten with Rp 21.6 billion in order to maintain people ’s confidence. Of the country’s 237 banks, 66 were liquidated. Its seven stateowned banks were merged into five. A number of banks were recapitalized. All of this effort cost Rp 650 trillion, with interest rates in 2002 close to 90 percent and a deficit budget reaching –47 percent in 1999 (figures 9-1 and 9-2). In addition to these efforts, the government has passed a series of laws with the aim of restructuring state-owned banks.4 After the recapitalization program, tax revenue increased as well as revenue from IBRA, and bank stock prices continued to improve through early 2004 (figures 9-3 and 9-4). Economic growth in 2003 was 4.2 percent, higher than the 3.7 growth rate of 2002. The 2003 exchange rate was Rp 8,465 to the U.S. dollar. The 2003 infla-     2. “Master Plan Badan Usaha Milik Negara Tahun, 2002–2006” (2002). 3. Ahmadjajadi (2002); “BUMN Incorporated Dalam Rangka Memperkuat Strategi Bisnis” (2003). 4. The laws are People Assembly’s Decree IV/MPR/1999; People Assembly’s Decree X/MPR/2001; People Assembly’s Decree VI/MPR/2002; Law 25/2000; Law 19/2001; Presidential Decree 22/2001; State-Owned Enterprise Minister Decree 35/2001; Law 19/2003. 09-1335-5-CH 09 12/9/04 3:37 PM Page 230 tion rate was 5.06 percent, compared with 10.03 percent in 2002. The 2003 interest rate was 8.3 percent, compared with 12.9 percent in 2002. Bank deposits and credits increased in approximately balanced amounts. Third-party fundraising up to September 2003 was Rp 952 trillion, an increase of around 3...