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Indonesia faces up to post-IMF
reality
By Bill Guerin
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.
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