Dow Jones: Indon Economy In Freezer Amid Intl Loan Delays (fwd)

[Robert Weissman <rob@essential.org>]

Dow Jones Newswires
September 21, 1999
Indonesian Economy In Freezer Amid Intl Loan Delays
By GRAINNE MCCARTHY
JAKARTA -- What a difference a year makes.
A year ago at the annual meetings of the International Monetary Fund and
the
World Bank in Washington, Indonesian finance minister Bambang Subianto
sought
to convince the participants that the worst of the crisis in his country
was
over. He urged them to continue to support the recovering Southeast Asian
nation.
This year he's not even going. Instead of capital rushing into Indonesia,
United Nations troops are rushing into East Timor and the IMF and World
Bank
have cut off support to the country because of a damaging banking scandal,
putting Indonesia on a different track to its recovering Asian neighbors.
While other Asian countries are being upgraded by the ratings agencies,
Standard & Poor's warned last week that it may downgrade Indonesia as a
result of its recent difficulties.
"We try to make our analysis as comparative as possible," says Ashok
Bhatia,
sovereign analyst for Asia, at Standard & Poor's in London. "The peers for
Indonesia at this stage are Russia and Pakistan."
Indonesia's $43 billion economic program with the IMF is on hold and the
government is expected to miss a host of deadlines for economic reforms
agreed with its international lenders. The upshot: Indonesia's fragile
economic recovery has been set back by months, analysts reckon, and the
price
of the reform delays is set to send the cost of recapitalizing its troubled
banks soaring even further.
"Even before the dispute with the IMF, we already saw that things like
privatization were way behind the curve," said Song Sen Wun, economist at
G.K. Goh in Singapore. "Now everything is in the freezer."
Relations with the IMF turned sour after it emerged in August that the
equivalent of around $80 million had gone missing out of PT Bank Bali, a
bank
that's on the government recapitalization list and that was taken over by
the
state in June.
Public Calls To Disclose Results
The money, which came out of a transfer of around $120 million to Bank Bali
by the government to pay it back for debt owed by a closed bank,
disappeared
out of Bank Bali to a company controlled by a senior official in the ruling
Golkar party, allegedly for political use. The money was paid by the
central
bank under a government guarantee.
Opposition figures and analysts allege the transfer out of Bank Bali was
orchestrated by a group of senior government and business executives close
to
President B.J. Habibie to help finance his presidential election campaign.
The government appointed PricewaterhouseCoopers to audit the affair but it
says the firm can't publish the full results of the report, citing legal
constraints. Pricewaterhouse has only published a synopsis that doesn't
name
any of the culprits.
The IMF and World Bank have publicly called on Indonesia several times to
disclose the results, but there is little political will in Indonesia to do
so, with presidential polls looming.
In the meantime the funds remain switched off.
The delays, of around $3 billion in total from multilateral lenders and
other
donors, isn't hugely damaging yet, but will start to hurt Indonesia
eventually, analysts say.
While many investors were steering clear of Indonesia in any case because
of
uncertainty ahead of those polls, they reckon the Bank Bali scandal and the
ensuing clash with the IMF has made the situation worse.
"The long-term effects are going to depend on how they settle this," said
Don
Hanna, regional economist at Goldman Sachs in Hong Kong. "This is certainly
creating an environment where 'let's wait and see' is the dominant factor."
The rupiah (IDR) has managed to weather the storm fairly well. Although the
currency hit a low of IDR9,025 to the dollar earlier this month on the back
of the East Timor crisis, it didn't slide to IDR10,000 as some had
predicted
but rebounded to its current level of around IDR8,300.
Jakarta stocks also dived after the vote in East Timor unleashed a wave of
terror on the ground, but they've also recovered with the main index
holding
steady around 550 points.
Rupiah Still Subject To Volatile Swings
Analysts note though that this represents more the fact that trade is so
thin
than any complacency over Bank Bali or East Timor. The rupiah remains weak
-
it's down about 22% from late June - and is still subject to volatile
swings,
they say.
"Although Indonesia's foreign exchange reserves are well up from where they
were at their trough...the adjustments on the exchange rate show there's
plenty of uncertainty in the system," said Bhatia at S&P, which put its
Indonesia ratings on CreditWatch, with negative implications, last week.
Indonesia has around $15.58 billion in foreign exchange reserves now, down
from levels above $16 billion a few months ago, but still above the target
of
$14 billion agreed with the IMF.
On the structural front, more tangible damage is being done. According to
Indonesia's July agreement with the IMF, the government was supposed to
issue
the first set of bonds to recapitalize state-owned Bank Negara Indonesia
and
two other state banks by Sept. 30.
It also pledged to revamp the management of these banks by the same date
and
issue further bonds for newly merged state-owned Bank Mandiri.
The damage to confidence caused by the Bank Bali affair has set crucial
bank
and corporate restructuring back months if not longer. In addition, the
Indonesian Bank Restructuring Agency's target to raise IDR17 trillion this
year from asset sales looks increasingly doubtful, anlaysts say, given the
fact that IBRA's actions have been paralyzed by the Bank Bali
investigation.
Bank Indonesia governor Sjahril Sabirin and deputy governor Miranda Gultom
are going to the IMF and World Bank meetings next weekend in Washington,
but
what they can tell their counterparts is unclear. Analysts say that unless
the Bank Bali report is published, it may even be difficult to resume
lending
to Indonesia under a new government, given the ill-will that exists towards
the country over its handling of East Timor as well as the Bank Bali
fiasco.
"The multilaterals are under tremendous pressure from their shareholders,
in
view of East Timor not to cut Indonesia a lot of slack," said Hanna, at
Goldman Sachs.
By Grainne McCarthy; 62 21 3983 1277; gmccarthy@ap.org
-0-    21/09/99 11-21G