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Indonesia faces up to post-IMF reality JAKARTA - After five years under the harsh tutelage of the International Monetary Fund (IMF), Indonesia, Southeast Asia's largest economy, is to break free from the IMF's bailout program and loan lifeline at the end of this year when its US$5 billion line of credit expires. A government committee has drafted an economic blueprint, a White Paper for post-IMF Indonesia that will be revealed on Friday, simultaneously with the draft budget for 2004, by President Megawati Sukarnoputri.
The IMF will continue to monitor the country's post-IMF economic reform program, but only as auditors and advisors - they will come to Jakarta twice a year to review progress, much as they have done since 1997. Jakarta chose to move to this so-called post-program monitoring rather than take the politically-impossible option of staying in the program, or simply dropping out as some nationalist firebrands had urged.
This is a political victory for the nationalists, who have long argued that the IMF program was a violation of Indonesia's sovereignty. They cited Indonesia's apparent shame and anger when seeing then-IMF managing director Michel Camdessus, standing over ex-president Suharto, arms folded across his chest like a reproving schoolmaster, as Suharto signed the first-ever Letter of Intent on January 15, 1998.
Camdessus, they said, had humiliated the president and the country. Since that time Kwik Kian Gie, a former coordinating minister for economy, finance, and now state minister of national development planning, has led a concerted campaign to free Indonesia from foreign shackles.
The decision to leave the program is decidedly pragmatic as it also delays the need for Jakarta to start repaying an estimated $7 billion still owed to the IMF. The IMF still must make two disbursements to complete its five-year, $5 billion loan and agreed last month to the disbursement of the penultimate installment of about $480 million.
However, the downside is that it ruptures the credit rescheduling line through the Paris Club of official creditors, who had earlier agreed to reschedule $3 billion worth of principal debt and interest in 2004. The fundamental challenge for the government remains much the same post-IMF - how to finance expenditure without increasing its massive debt burden yet again. Total foreign debt is $130 billion, with state debt making up $75 billion. Foreign reserves stand at $34 billion.
Re-establishing credibility with the market may not be easy. Analysts warn that the move away from IMF aid, coupled with the heightened security issue, following the bombing of Jakarta's Marriott Hotel, and the upcoming general elections, may severely undermine investor confidence and inhibit capital flows.
The IMF's assessment of reform progress still carries weight with creditors, rating agencies and investors. Moody's Investors Service has warned that by leaving the IMF bail-out program, Indonesia would complicate its chances of winning a likely ratings upgrade.
Indonesia's external finances could be "more vulnerable" without new IMF credit, Moody's said, adding that it was reviewing a possible upgrade in Indonesia's ratings following substantial cuts in government debt ratios and reduced external exposures. Its current foreign currency rating on Indonesia is B3.
Earlier this year, another rating agency, Standard & Poor's, raised Jakarta's long-term foreign currency rating to B- from CCC+, although that still makes it more expensive for Indonesia to borrow than for a number of other Asian countries.
Indonesia is unlikely to follow the success of Korea or Thailand. The former was able to regain market confidence in April 1998 (less than four months after the worst of the crisis), when issuing a heavily oversubscribed $4 billion sovereign bond. Capital inflows surged in 1999 and have remained robust since then. Korea's GDP per capita recovered fully (to its 1997 level) in 1999.
In Thailand, investor sentiment recovered more slowly, and didn't return to pre-crisis per-capita GDP levels until 2002. But the country, whose economy is booming, still plans to pay off - two years early - a $5.4 billion loan from the IMF and other lenders.
Certainly, it is undeniable that macroeconomic stability has improved in Indonesia over the past few months. Continued cuts in Bank Indonesia's interest rate, inflation capped within normal levels and a stronger rupiah have encouraged both the IMF and the government to be upbeat about next year.
Growth last year was 3.66 percent, in spite of the slowdown following the Bali blasts in October that killed 202 people. The IMF expects about 4 percent growth this year despite the subsequent hotel bombing on August 5 and 4.5-5 percent in 2004 provided the government continues its commitment to reform. "As long as reform remains on track I think the situation is financeable. But the reforms are key," warns David Nellor, the IMF's man in Jakarta.
But Indonesia's "2003 - The Year Of Investment" has fallen flat on its face with the government continuing to dig in its heels over bringing a higher comfort level to would-be investors through legal reforms, slashing red tape, eliminating illegal fees imposed on businesses, and improving security conditions.
Liquid assets like shares and bonds are not affected by these factors and though investors have been deterred by Indonesia's junk-grade credit rating, next year the government is almost certain to turn to the capital markets with the issue of a sovereign bond, the first issue since the Asian crisis, to help fund next year's budget.
Though the budget deficit has more than halved in recent years it is still expected to be around 20 trillion rupiah ($2.34 billion) next year. The government is expected to look to the international bond market to plug the deficit. It aims for a budget gap of some 1 percent of gross domestic product, from 1.8 percent this year, and a zero deficit by 2005.
Modest rebounds in stocks and the rupiah, the region's best performing currency, after the second major terror attack on the country in a year suggests the market may not be as spooked as it ought to be. Even Finance Minister Boediono warned this week, "The important thing is security. 2004 is a crucial year [because of] the many economic, political and security uncertainties."
Former labor minister Bomer Pasaribu has warned of an unstable social, economic and political situation unless emergency measures are taken. He predicted this week that unemployment would increase by 6.2 percent to 42.5 million people from 40 million at the beginning of this year.
Though hardly as far out of line with reality as Suharto's final 1998 budget, which included the same overly optimistic predictions of 4 percent annual economic growth, Jakarta's estimates of such growth levels appear over-optimistic. Improving the investment and business climate at home would help Jakarta spur economic growth and emulate Thailand. But inside or outside of the IMF program, the three main obstacles to real recovery in Indonesia remain cast in stone.
Political instability, the lack of secure rights to property and personal safety, and the absence of rule of law: all three are very much worse than at any time since the IMF first committed to bail out Indonesia.

Posted in Economy @ 17 August 2003 00:02 CET by Jeroen · 'Blog' RSS feed · permalink

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