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October 9, 1997

Indonesia Reaches Out to IMF To Combat Loss of Confidence

By RICHARD BORSUK Staff Reporter of THE WALL STREET JOURNAL

JAKARTA, Indonesia -- Indonesia, struggling to combat a stunning loss of
confidence in its economy and crushed currency, has imported a potent
weapon: the International Monetary Fund.

It isn't clear how the weapon will be wielded. A government statement,
issued after economic ministers met with President Suharto, said Indonesia
is "sounding out" the IMF for "long-term support funds," and requesting
that it and the World Bank "assist in efforts to strengthen"  the
country's battered financial sector.

Economists don't expect Indonesia to seek a huge bailout similar to that
arranged for Thailand in August. But some suggest any financial support
might consist of an IMF standby credit facility complemented by a World
Bank program to support restructuring of the banking system.

The announcement was warmly greeted by many business executives and
economists. The key question now is how much clout will be exercised by
the fund, which is sending two teams to Jakarta later this month. There is
initial agreement that the IMF presence will push ahead badly needed
economic reforms, but doubts about just how far it can push.

On Thursday, a World Bank official said an IMF mission will arrive in
Jakarta by Friday. Dennis de Tray, director of the World Bank's Indonesia
country program, said the formulation of a package should be completed in
"weeks, not months."

Mr. De Tray said the joint mission will focus on reforming the nation's
financial system. He noted that IMF officials would have to move to revive
the nation's money market system. IMF must also determine not just the
level of existing private-sector debt in Indonesia, but also the amount
that's unhedged and the strength of the corporates involved.

Bank Indonesia, the nation's central bank, has calculated that Indonesia's
private sector debt equals $55 billion. Of this, the Bank of International
Settlement in Geneva says, $34 billion comes due within 12 months.

Many financial market analysts, however, are now starting to believe that
the level of this debt could be well above the $55 billion figure. They
note that such massive demand for U.S. dollar from Indonesian corporates
in recent weeks is proof of this.

Mr. De Tray, however, said he wasn't, as yet, convinced of this and still
sticks by the Bank Indonesia and BIS figures.

IMF Backs Indonesian Policies

In Washington, IMF managing director Michel Camdessus said in a statement
that his organization "strongly supports the approach that has been
followed by Indonesia, which sees this as an occasion to strengthen its
economic policies even if fundamentals are basically sound."

Mr. Camdessus didn't elaborate on what form the IMF might take. However,
an official familiar with IMF thinking said the program will include
"conditionality" -- which means that Indonesia would have to comply with
certain specified guidelines in return for financial assistance. The
official said he'd be "surprised if it's conditionality that Indonesia
will resist." He declined to be more specific, but cited remarks by Mr.
Suharto and others as outlining the types of reforms the IMF would seek.

In Jakarta, Mr. de Tray said bringing in the IMF to analyze the economy
and "basically provide a stamp of approval to a reform program seems to me
probably the quickest way to restore international confidence in the
economy."

Focus on Privileged Deals?

Some economic analysts and business executives also hope the IMF's
involvement will permit Indonesian economic policymakers to eliminate
monopolies and other privileged business arrangements sheltered from
reform by vested interests.

"I'm hoping the IMF can kill the national car," said one Jakarta
businessman, referring to a controversial auto-making venture led by Mr.
Suharto's youngest son. "The president won't listen to the technocrats on
this, but can he be made to listen to the IMF?"

Whatever the IMF's role turns out to be, its emergence on the stage is
likely to provide a major boost to confidence in Indonesia, badly bashed
in the past two months. The rupiah has been ravaged, losing about 28% in
value against the dollar since the Indonesian currency was floated on Aug.
14. Domestic banks have largely stopped lending, after a liquidity squeeze
sent interest rates soaring. Gloom rooted in the currency woes has been
compounded by blows to Indonesia from the worst drought in 50 years, plus
raging forest fires whose smoke has endangered millions in Southeast Asia
and angered Indonesia's neighbors.

'Very Good News'

Turning to the IMF for help "is very good news," said Francis S.H. Lay,
president of PT Bunas Finance Indonesia. "It will boost confidence, and
that's what we really need."

Word of the announcement spread late in the trading day and didn't have a
major immediate impact on markets. The rupiah initially rose about 1% to
3,655 to the dollar, but by Wednesday evening it was trading at about
3,700, near where it had started the day. On the Jakarta Stock Exchange,
the composite index rose 4.99 points, or 1%, to close at 518.94.

Many economists argue that Indonesia's economic situation isn't nearly as
grim as that of Thailand, where the IMF organized a $17.2 billion rescue
package. But government officials and some businesspeople hope the IMF's
presence will help currency and share markets to stop panicking and start
looking again at economic fundamentals.

The World Bank's Mr. De Tray said Indonesia has been beset "not by an
economic crisis, but by a crisis of confidence." Although Jakarta was
taking the right steps to try to boost confidence, "what the government
was doing was simply having no effect," the World Bank executive said.

Calling Wednesday's announcement a "very good move," Mr. De Tray said the
Indonesian government "has very wisely decided to call in the IMF and the
World Bank before it was forced to do so."

Effect of Attack on Rupiah

Washington-based monetary officials agreed that the markets' battering of
the rupiah isn't justified by underlying fundamentals, but they worry
about the effect of a sustained devaluation on the country's economy. "No
small country can withstand a ferocious attack that starts going in the
wrong direction," one official said.

But confidence can't be restored at a single stroke, businesspeople and
analysts said. They say it will take a sustained set of measures,
especially in cleaning up the country's banking system, which is saddled
with large amounts of loans that aren't likely to be paid.

Also, pressure is bound to remain on the rupiah as heavily indebted
Indonesian companies scramble for dollars to repay dollar-denominated
loans that creditors don't agree to roll over. Still, calling in the IMF
could help address this problem: "Its presence should make foreign banks a
little more comfortable about rolling over borrowings," a U.S. based fund
manager said.

'No Urgent Need'

Indonesia's decision to go to the IMF surprises many Indonesians.
Fundamentally, there was "no urgent need to do this," said Mohammad Sadli,
an economist and former mines minister. But, he said, maybe Indonesian
officials "want to be ahead of a possible crisis and call in the doctor
early so they may be able to prevent a real crisis from developing."

The decision came out of a meeting late Tuesday night among technocrats,
who on Wednesday morning won the president's endorsement, officials said.
It was rooted in developments last Friday, when the rupiah dropped like a
rock -- losing more than 8% in value in a single day.

According to people familiar with the situation, Mr. Suharto readily
agreed with the suggestion to call in the IMF, though it is unclear what
ideas he may have about the fund's precise role. They said that the key
person in gaining the president's approval -- and the person who will be
key in defining the IMF's role in Indonesia -- is Widjojo Nitisastro, dean
of a group of U.S.-trained economists known as the "Berkeley Mafia"  who
have advised Mr. Suharto in times of crisis since he came to power in
1966.

Since currency volatility started rocking Southeast Asia in July, the
70-year-old Dr. Widjojo has been playing a pivotal behind-the-scenes role
in policy planning. Wednesday's government statement was the first to show
publicly that he is back in the cockpit of policymaking years after his
tenure as senior economic minister in the cabinet ended and he was named
economic adviser, a noncabinet post. The last of eight points in
Wednesday's announcement said that to "assist implementation" of the
previous seven points, Mr. Suharto has instructed Dr. Widjojo to "take the
necessary steps."

The first seven points of the statement list a range of measures and
principles the government says will guide policy. Indonesia, it contends,
"will undertake those structural adjustments needed to enhance the
efficiency and competitiveness of the economy."

Postponements to Stand

One of the points says that a presidential decree last month on project
postponements will be "strictly enforced." While those postponements --
affecting power plants, toll roads and other projects -- were initially
welcomed by many as a signal that the government is serious about
tightening its belt, the message was later scrambled to some extent by
several ministers saying they felt that some projects marked for
postponement could still go ahead. "That's the Indonesia story," a foreign
stock analyst said. "There are always mixed signals. Every time something
good is done, it's undone by something bad."

Dr. Widjojo, the government and the IMF now face the critical task of
deciding what steps are necessary to push reform and fix the banking
sector -- without sending mixed signals that could undermine confidence.

Some analysts expect that the IMF will extend a standby line of credit to
supplement the $2 billion in standby loans that Bank Indonesia, the
central bank, keeps on hand from commercial banks. Indonesia might take
several billion dollars in extra standby loans, they suggest.

After making Wednesday's announcement, Finance Minister Ma'rie Muhammad
said that if the IMF provides funds to Indonesia, the government will use
them only as a standby for foreign-exchange reserves. Indonesia's
foreign-exchange reserves stood at $20.5 billion at the end of September,
covering five months' imports, Bank Indonesia Gov. Soedradjad said.

The statement said "While Indonesia's foreign-exchange reserves remain at
a safe level, nevertheless and in order to safeguard the situation, the
government is sounding out long-term support funds from international
institutions including the IMF."

Aside from money, the IMF will be looked to by many to put muscle into
programs to clean up banks' bad debts.

Many businesspeople also hope the IMF will impose conditions that will
help end Indonesian monopolies and special privileges, such as the
national car program that gives one company, PT Timor Putra Nasional, huge
tax breaks. Mr. Sadli, the economist, said whether Mr. Suharto is willing
to part with "sacred cows" such as the national car project, a
controversial clove monopoly and monopolies on trading some agricultural
commodities "will be an acid test" for the president.

--Raphael Pura in Kuala Lumpur and Jacob M. Schlesinger in Washington
contributed to this article.


Copyright � 1997 Dow Jones & Company, Inc. All Rights Reserved.



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