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Economic rebound expected in '99

Source
International Herald Tribune - April 1, 1999

Michael Richardson, Jakarta – Indonesia's badly battered economy appears to be stabilizing and could return to growth before the year is out, according to officials and analysts who have been tracking it.

Their cautious reassessment came as Standard & Poor's Corp., the US-based credit-rating concern, said Wednesday that the outlook for Indonesia's foreign and local currency debt was now stable.

It said this was so even though Indonesia's corporate sector had been "devastated" by the collapse of the rupiah as financial turmoil spread from Thailand to other parts of East Asia in 1997 and 1998.

The report, on the day before Indonesia starts its new budget year, followed several recent promising developments – including major surgery to restore the heavily indebted banking system to health and an agreement with foreign banks that allows local banks more time to repay their loans.

It attributed the improvement to moves by the Indonesian central bank, backed by the International Monetary Fund, to restore monetary discipline, stabilize the rupiah, and reduce inflation from almost 70 percent in 1998 to an expected average of about 25 percent in 1999.

Indonesian financial markets were closed Wednesday for the end of the fiscal year. But the dollar was quoted at 8,745 rupiah at the close of trading on Tuesday – almost exactly the same level as a year earlier. The dollar brought only 2,400 rupiah before the East Asian financial crisis struck in July 1997.

Hit by that crisis, Indonesia's economy shrank by 13 percent in 1998-99. But Dono Iskandar Djojosubroto, managing director of Bank Indonesia, the central bank, said Tuesday that the package of foreign relief loans together with economic reforms being implemented by the government "will provide the basis for a sustained recovery of the economy beginning later this year."

The International Monetary Fund's first deputy managing director, Stanley Fischer, said last week that an upturn in economic activity in Indonesia could start in the second half of 1999, although he cautioned that considerable risks still lay ahead.

He made his comments as he announced that the IMF was releasing $460 million to Indonesia and would increase its loan total by a further $1 billion to $12.3 billion. He said that corporate restructuring needed to be implemented more forcefully and bankruptcy laws made consistent with international practice.

Mr. Fischer added that the recently announced program to restructure the Indonesian banking system would also need to be "carried decisively forward within the next two months."

The Indonesian government announced in March that it would close down 38 domestic private banks, nationalize seven, inject money into nine and let 73 relatively healthy banks continue operations.

It promised to complete the recapitalization process for the nine banks by June 30. But some analysts are concerned that a new audit of the banks for the year to March 1999 will reveal a much worse bad-debt situation than the previous audit for the year to March 1998.

As a result, some of the major bank shareholders may be unable or unwilling to pay their agreed share of 20 percent of the recapitalization.

Standard & Poor's said Wednesday that the restructuring program would give the government control of 80 percent of the domestic banking system, while recapitalization would cost about 35 percent of Indonesia's 1998 gross domestic product.

"With corporate restructuring still embryonic, bank restructuring alone will not restore credit flows to the private sector, and working capital bottlenecks will continue to delay real economic recovery," S&P said.

Reflecting the concerns of many investors and economists in Indonesia, it said that upcoming elections might lead to policy paralysis, another balance of payments crisis, and debt defaults.

In a recent assessment, the World Bank said it expected the Indonesian economy to contract by 1 percent in 1999-2000 before expanding 3 percent the following year as a revived agricultural sector, which provides many of the country's exports, helped fuel a recovery.

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