Key perspectives in Bank Century bailoutArkas Viddy and Eggi Sudjana , Melbourne/Sydney/Jakarta | Thu, 01/14/2010 9:32 AM | OpinionThe Bank Century bailout policy was implemented, because, as the government argued, it was necessary, otherwise Bank Century Bank would have collapsed.
When it did collapse, not only would Century customers be shocked and lose their trust in the bank, but also the customers of other banks would lose trust in other banks.
And a run on banks rush would have been the consequence. People would have withdrawn their savings en masse, which would have massively their money led to another massive crisis rush like what happened during the 1997 financial crisis.
But Let us examine the government policy based on both quantitative and qualitative approaches, to help to decide whether the bailout policy was effective or not.
First, let’s look at the decision from an economics perspective. We will use Linear Multiple Regression formulation by puttingusing the input from the bailout policy variable as a dummy variable, where a 0 score to time series before bailout policy implementation periods (before December 2008) and 1 score to time series after bailout policy implementation (December 2008 to November 2009).
In this regression the independent variables that can be used are foreign exchange reserves, rupiah against foreign currencies especially US dollar, stock exchange rate, export - import, bank liquidity, Bank Century bailout policy, while Indonesia’s economic growth is the dependent variable.
Based on Bank Indonesia’s data for for the first quarter in of 2009, Indonesia’s economic fundamentals were in a relatively stable condition in facing impacts of the global financial crisis.
Foreign exchange reserves decreased to US$50.6 billion, but this amount was still controllable and it was not significant because previously the largest Indonesian exchange reserves had been $57.1 billion in 2007, while some years earlier there had only been between $40 and $50 billion. And this was completely different to what happened during the 1997 crisis when Indonesia only had about $20 billion.
In October 2008, the Jakarta Stock Exchange was closed with the composite index at 1,256.70 — a decrease of around 31 percent compared to the month beforehand, and 54 percent below the same period one year earlier — because of impacts of the global financial crisis, but it was not because of Indonesia’s economic fundamentals.
This could be compared with the data in August 1997, when the Indonesia Stock Exchange composite
index decreased by 34 percent because of increasing of inter-bank interest rates and the rise of Bank Indonesia’s promissory note (SBI) interest rates by between about 28 and 30 percent.
During the 1997 crisis, it this rate even went to between 75 percent and 300 percent, which never happen during the 2008 global financial crisis. Inter-bank interest rates and interest rates of SBI increased, but only from 9.25 percent to 9.50 percent.
The rupiah against foreign currencies, especially the US dollar, became relatively weak and fell 16 percent to Rp 11,050/USD at the end of October 2008. But it was fluctuative.
The situation was much worse during 1997 and 1998 crisis, when rupiah fell to its lowest level — dropping 600 percent to Rp 16,000 per dollar.
Another economic fundament is the inflation rate, and we compare the inflation rates during the 1997/98 financial crisis with those of the 2008 global financial crisis.
In October 2008, Indonesia’s inflation was at around 0.45 percent, while for the whole of 2008 it was about 11 percent. During the 1997/98 financial crisis period, inflation reached 77 percent.
It could be concluded that the bailout policy for Bank Century in Indonesia was not effective and also violateds existing rules and laws.
How about from law legal perspective?
The House of Representatives’ Bank Century Iinquiry Committee should consider to use implementing the law no. 242 in their its inquiry against investigations of Vice President Boediono (in his capacity as former Bank Indonesia governor), and Finance Minister Sri Mulyani.
It also needs to consider to cross-checking data from longer-term (at least from 2006 to 2009).
The Financial Stability System Committee (KSSK) used short-term data (from 2008) to justify the government’s bailout policy.
It would also be better for President Susilo Bambang Yudhoyono to explain what he has done in relation to the issuance of the 2008 government regulation in lieu of Law on the Financial Security Network System (JPSK).
According to this Regulation, the Finance Minister and Bank Indonesia Governor can not be punished for policies they issue.
The House has refused the chapter 29 of the this Regulation and asked the government to revise
it. However, the government has maintained this regulation as the legal foundation for the bailout decisioning of Bank Century, without any correction as requestedired by the House.
It is ridiculous that the government spent Rp 6.7 trillion from state coffers to bailout the bank.
Alternatively, this huge sum could have been spent in establishing around 6,700 school buildings,
or paying the yearly salaries of 200,000 teachers , where they each receive Rp 2.8 million For their a monthly salary.
The House’s committee must be able to acquire and use all necessary evidences from the Supreme Audit Agency (BPK) and the Financial Transaction Analysis Report (PPATK), to make sure that it would be able to issue the strongest legal recommendation.
Arkas Viddy, PhD is an international economy researcher in Australia.
Dr. Eggi Sudjana is a lawyer.
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