Share prices on the Jakarta stock exchange jumped 6.1 per cent yesterday after two of Indonesia's largest banks said they would merge, the first significant step towards meeting a government pledge to restructure the banking sector.
The rupiah crashed to Rp9,575 to the dollar (72p), down from Rp8,450, amid growing concern over foreign debt defaults and unconfirmed rumours that President Suharto had picked a controversial minister as his running mate for elections in March.
Bank Internasional Indonesia (BII), part of the Sinar Mas conglomerate, said it would merge with Bank Dagang Negara Indonesia (BDNI) and three small affiliated banks. BII and BDNI are the third and fourth-largest listed banks, respectively, but both were hit hard by the rupiah's collapse.
The merger, which would create Indonesia's largest bank with Rp50,000 billion (£3.7 billion) in total assets and Rp5,000 billion in equity, follows last week's pledge by President Suharto to accelerate economic reforms agreed with the International Monetary Fund.
Standard & Poor's last week downgraded ratings of 15 of Indonesia's 225 banks, including BII and BDNI, and forecast the average rate of non-performing bank loans in Indonesia would surpass 20 per cent this year.
"We'll cut a lot of cost and increase profits," said Mr Indra Widjaja, president director of BII. "With more profits we can make more provisions for bad loans."
The government failed to announce new banking reforms in last week's IMF agreement and is said to be split between those pressing for the closure of troubled banks and those who want large banks to bail out smaller competitors. The closure of 16 small banks in November caused depositors to flee most private banks.
News of the merger sparked a rush on bank shares but the rupiah nose-dived, dashing any hopes among officials that last week's IMF package would revive trust in the currency and enable Indonesian corporate borrowers to repay more than $80 billion (£58 billion) in private offshore debt at an affordable rate.
