Chris Lydgate in Singapore and Louise Williams in Jakarta – The Indonesian President's comments that the Singapore Government had agreed to offer a $US10 billion ($14.2 billion) aid package to Jakarta, separate from ongoing negotiations over an International Monetary Fund rescue package, have caused shock and confusion among the region's economic analysts.
Singapore was abuzz with speculation yesterday about the Government's motivation in offering the aid, the effect it would have on Indonesia's delicate negotiations with the IMF, and whether Indonesia's President Soeharto had simply misspoken or was trying to improve his bargaining position.
The announcement came as IMF officials left Jakarta after two weeks of talks aimed at reaching agreement over a loan program to prevent corporate and banking collapses in the face of massive US dollar debts.
The negotiations have been held behind closed doors but analysts said the IMF was likely to insist on sensitive reforms such as cuts in consumer subsidies, removal of agricultural monopolies, a major banking shake-out and possibly the scrapping of projects linked to the political elite.
An IMF austerity program would be likely to force an increase in prices of fuel and electricity, both of which are highly politically sensitive as Indonesia faces a certain economic slow-down, spiralling unemployment and inflation because of the collapse of the rupiah and the stock market.
Confusion arose in part because Singaporean officials did not endorse Mr Soeharto's remarks.
An official from Singapore's Ministry of Foreign Affairs simply reiterated that Singapore "would help to supplement the IMF effort" and said the details had not been finalised, while a spokesman for the Monetary Authority of Singapore declined to elaborate.
An Indonesian Finance Ministry official said the details of the Singaporean offer had not yet been worked out, but confirmed that the money was not linked to the IMF package and would, therefore, not come with the same conditions.
A Jakarta newspaper quoted a Singaporean source as saying the first $US5 billion came "with no conditions imposed". President Soeharto said Singapore would provide a $US5 billion soft loan and spend a further $US5 billion buying rupiah on the money market to prop up the Indonesian currency, which has lost more than 35 per cent of its value against the US dollar in less than three months.
At the same time, Mr Soeharto also said: "Don't misunderstand. We are not asking the IMF for money. We already have programs in place, we just need the IMF to check them because they have experience. The situation is not that we are asking for money from the IMF, then we are tied to this or that condition."
Singapore's Prime Minister, Mr Goh Chok Tong, apparently made the offer last week as a gesture of ASEAN solidarity in the face of the financial crisis rolling through South-East Asia.
But details remained sketchy - until Mr Soeharto's off-the-cuff remarks at a ceremony at Parasuan in east Java. A day earlier, the visiting Malaysian Finance Minister, Mr Anwar Ibrahim, pledged $US1 billion for Jakarta.
Analysts said any agreement that jeopardised or even "watered down" the IMF negotiations would unsettle investors.
"The IMF's bargaining position falls through the floor if Singapore comes through with $10 billion without any conditions," said an analyst, Mr Bruce Gale, of the Political and Economic Risk Consultancy in Singapore.
"I can't believe they'd do that."
Mr Tom Soulsby, head researcher for ANZ Securities in Jakarta, said: "It [the offer] reduces the leverage ability of the IMF to get reforms through... Some of the hard decisions that need to be made may not be made."