Aid from donors vital for deficit<\/p>\n
By Suresh Kumar<\/p>\n
SINGAPORE (JP): Let's make no mistake about it. Indonesia
\nneeds the US$4.8 billion aid granted by the Consultative Group on
\nIndonesia (CGI). The doubts that have been raised over this huge
\ndebt are understandable. But these queries are themselves
\nquestionable. Here is why.<\/p>\n
The debt is crucial for the deficit. Essentially, the
\ngovernment has secured funds that would help finance a huge
\nportion of next year's operations. The amount pledged by the
\nvarious nations and institutions, represents about a third of the
\n2001 deficit. Hence the size of the loan is no small amount.<\/p>\n
The biggest worry has been over the huge reliance on foreign
\nloans. Indeed the external debt is as large as the Indonesian
\neconomy. The government owes the world two-and-a-half times the
\namount it has in reserves at the moment. External public debt is
\naround Rp 75 billion while reserves are around Rp 29 billion.<\/p>\n
The private sector's bill is larger than all the goods and
\nservices exported last year. Corporate debts are around Rp 69
\nbillion while exports for 1999\/2000 were Rp 55.2 billion. The
\nbudget's interest payment on foreign debt is as large as the
\nactual fresh loan portion of the CGI aid of Rp 20 trillion. Hence
\nthe natural concern among many over this debt situation.<\/p>\n
However at the moment, Indonesia has no other choice. Among
\nthe three sources of funding for the 2001 deficit, the CGI money
\nrepresents the most \"feasible\" option.<\/p>\n
The upcoming deficit is projected at Rp 52 trillion. This will
\nbe met through privatization proceeds (Rp 5 trillion) and asset
\nsales (Rp 27 trillion) of the Indonesian Bank Restructuring
\nAgency (IBRA) with the balance coming from the CGI aid. But as it
\nstands we are not too confident with the first two sources if
\nthis year's track record is anything to go by.<\/p>\n
Even by September, the government had not collected any
\nprivatization receipts at all. The lack of interest in state-
\nowned enterprises was supposedly due to poor investor confidence.<\/p>\n
As for IBRA, it is noted that some Rp 12 trillion out of Rp
\n18.9 trillion has been raised so far. To meet and even surpass
\nthis target, structured loans worth Rp 8 trillion will sold be
\nshortly. But at a similar auction this year, only Rp 680 billion
\nwas raised, though the recovery rate on the sale was 70 percent.
\nLike the privatization bottleneck, investor confidence will be
\nkey for IBRA sales this and next year.<\/p>\n
Thus until investor confidence picks up, we have to rely on
\nforeign loans as a sure source of funding.<\/p>\n
This is why we cannot entertain what ex-finance minister
\nBambang Sudibyo suggested in The Jakarta Post yesterday -- that
\n\"as an alternative to this (CGI) loan, the government could push
\nits privatization efforts and sale of IBRA assets\".<\/p>\n
Reliance on foreign loans is bad for the long-term. However as
\na short-term measure it is acceptable. This is really part and
\nparcel of the assumptions underpinning the existing program of
\nthe International Monetary Fund (IMF) now in force. That is,
\ndespite the outward appearance of ratios and figures, which
\nsuggest indiscipline, it is the government's commitment to
\naddress this which will be more crucial.<\/p>\n
It is noted that net foreign financing meets 42.4 percent of
\nthis year's deficit while for next year, this item will occupy
\n38.6 percent. Hence it is not as if the Indonesian government is
\nnot trying to restrain itself. Also Indonesia is striving to
\nimprove its external debt position by targeting 80 percent (from
\nthe present 100 percent of gross domestic product) as its next
\nstop.<\/p>\n
Some had also suggested that the CGI aid was not really
\nessential as the budget could be reworked to raise more money.
\nOne way would be to raise the oil price and exchange rate
\nassumption made in the budget (this may raise about Rp 12
\ntrillion).<\/p>\n
This may be possible. However we forget the other side of the
\nequation. Any gain obtained by raising the price\/rupiah numbers
\nwould be eroded by higher expense on subsidy and servicing of
\nforeign debt. The net effect would be to fall short of the
\nnecessary money.<\/p>\n
It was also suggested that what would have been ideal in terms
\nof these foreign negotiations would be debt write-offs. In fact
\nprominent Indonesian non-governmental organizations had even
\ntraveled to Tokyo to plead this case. However quite
\nunderstandably this was not granted. Discounts in size of debts
\nare really huge prizes given away. Many doubt if Indonesia had
\ndone enough in the way of reforms to qualify for this.<\/p>\n
This is perhaps the real lesson from Tokyo. That, Indonesia
\nhas done just enough in reforms to get by but not enough to
\nplease others so much that they would hand out the ultimate
\nprize.<\/p>\n
To use an analogy, Indonesia grabbed the silver medal in Tokyo
\nbut missed out on the gold.<\/p>\n
It is not as simple as it was made out to be by some
\nlegislators who argued that Indonesia should have came back with
\nreduction in outstanding sums or simply \"haircuts\". Indonesia is
\nnot in an economic bracket low enough to argue for this
\npersuasively.<\/p>\n
But Indonesia may get such discounts from her friends if they
\nfeel she has done enough for them to go back home and convince
\ntheir governments. To justify such a huge loss to themselves,
\ndonors must be able to explain why to their governments and
\nparliaments. Hence it is up to Indonesia to help itself.<\/p>\n
So never mind for now if Indonesia didn't get the top prize.
\nBringing home any medal is to be welcomed -- for it was not too
\nlong ago that Indonesia seemed destined to lose everything.<\/p>\n
The writer is an emerging markets analyst at Standard and
\nPoor's MMS in Singapore.<\/p>",
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