Grainne Mccarthy, Jakarta – Indonesia's fourth agreement with the International Monetary Fund was greeted with resounding silence in financial markets Thursday, with many analysts dismissing its budgetary targets as still far too unrealistic.

And just as the three previous IMF agreements with former President Suharto went by the wayside, economists say this one will carry little clout unless Indonesia's recently-installed President B.J. Habibie adopts real political reform and holds new elections.

The IMF efforts to rescue the economy won't bear fruit until political confidence returns and stems the capital flight – much of it from the ethnic Chinese community – which has resulted from recent political upheavals. "This is as much a political issue as it is an economic one at this juncture," said Geoffrey Barker, chief economist at Dresdner Kleinwort Benson in Hong Kong. "Obviously it's good news to a point that the IMF has reached a deal, but that's not the main event," he added. "As far as the rupiah is concerned, there's still fears of capital flight while there's uncertainty on the political front," Barker said. "This makes it so difficult to make a forecast based on economic fundamentals."

The Indonesian government signed a new letter of intent with the IMF late Wednesday, which should clear the way for a $1 billion installment of the IMF's $10 billion standby loan around mid-July. The loan is part of an overall IMF-led $43 billion assistance program for Indonesia.

The agreement, unveiled Thursday, forecasts the embattled rupiah (IDR) at IDR10,000 to the US dollar in the fourth quarter of the year and predicts the economy will contract by "more than" 10% in the fiscal year that ends March 31, 1999. It forecasts a budget deficit of 8.5% of gross domestic product for fiscal 1998/99, the lion's share of which will be financed by international lending.

"This is positive in that it puts down some assessment of where the economy is going and that it is far worse than previously thought," said Song Seng Wun, regional economist for G.K. Goh Securities in Singapore. "But they're also making the assumption that things will look better down the road. Maybe (the IMF) is living in a dream world." "If they say the economy is contracting by 10%, we can just double that up and keep going," Song said. "With that sort of scenario, revenues are shot to bits," he said, adding that a contraction of well above 20% would be far closer to the mark.

Indeed most economists dismiss the IMF's latest macroeconomic targets as still wildly optimistic – although more realistic than those last forecast in March, when the IMF predicted only a 5% contraction in the economy this year. Meanwhile, the chances of the rupiah strengthening to a level approaching IDR10,000 to the dollar – from current levels around IDR14,700 per dollar – are seen as woefully slim.

"I think the rupiah forecast is wishful thinking and I think that it's going to extremely difficult to bring inflation under control," said Barker. "It's pretty easy to pencil in a 20% contraction and pretty difficult to see why it will be better next year," he said. "At the moment, the leaky ship has been kept afloat by the printing press, then when you stop that, what will happen?"

One of the key concerns of the IMF has been to control the alarming rise in money supply, and ballooning inflation. From an annual 49% in May, inflation for the calender year is expected to soar to 80%, while the government pledged to keep it below 50% for the fiscal year. IMF director for Asia and Pacific Affairs Hubert Neiss said Thursday that the central bank will stop printing money and won't extend liquidity credits. The government is also moving to boost the independence of the central bank, while Bank Indonesia will begin to auction its central bank paper – SBI notes – beginning in July.

All this should, in theory, please the market – and hence boost the currency. But in practice, economists say, the political instability and uncertainty means investors will continue to keep their funds firmly outside the country. "The good news is that they moved quite fast on the package," said Neil Saker, head of regional economic research at Socgen Crosby in Singapore. "The problem is Indonesia is suffering from a loss in confidence. That takes ages to restore."

The acceleration of the economic crisis in Indonesia has led to a steady flight of capital offshore, which was only accelerated by the riots which rocked much of Indonesia last month and culminated in the resignation of Suharto, who ruled the country for 32 years. The ethnic Chinese minority, resented for their relative wealth, was heavily targeted during the riots that killed as many as 1200 people in Jakarta and left wide swaths of damage in other Indonesian cities.

"The nuts and bolts of the economy – the Chinese community – aren't in the country and their capital isn't in the country," said Song of G.K. Goh. "The political environment is very difficult for us to speculate on. I think we can give Habibie almost full marks for having pulled things together in an orderly manner so far, but the political picture is still vague."

Despite the skepticism, economists note that the IMF – four agreements later – has gone further down the road of accepting the unique nature and problems of the Indonesian economy. The IMF agreed that subsides for key fuels, electricity and essential foodstuffs must remain in place and will cost 6% of overall 1998/99 GDP – about four percentage points higher than envisaged in April. The IMF has also agreed to government earmarking 7.5% of GDP for social safety net programs in this, the world's fourth most-populous country. "In that degree, it's partly positive: at least the IMF recognizes the social responsibility," said Song.

The agreement with the IMF noted that further increases in prices of staple foods and fuels would exacerbate the impact of the crisis on the poor and will have to be delayed until the economy has begun to improve. "When you're looking at an economy contracting by 20% and unemployment increasing by 20-40 million people, they really didn't have any choice on subsidies," Song added.

The removal of some subsidies on electricity and fuel last month was thought to have been one of the main reasons behind the riots and protests. Fuel prices jumped up to 70% as the subsidies disappeared. Government ministers now say removing subsidies this year is virtually impossible due to the volatile economic conditions. "I think (the IMF) made a mistake in the first instance by trying to impose wholesale reform on the Indonesian economy," said Barker, of Kleinwort Benson. "There was a much broader and deeper problem then they realized, but they're realizing it now."

[According to the June 26 Financial Times, the IMF has said an additional US$4-6 billion was needed to repair Indonesia's economy and avoid further social unrest. On June 23, AP reported that several dozen protesters demonstrated outside the US Embassy on June 23, accusing the US of trying to delay the resumption of aid. Protesters said the US was interfering in Indonesia's internal affairs and held up banners such as "US is a great liar" - James Balowski.]