Aid from donors vital for deficit

By Suresh Kumar

SINGAPORE (JP): Let's make no mistake about it. Indonesia needs the US$4.8 billion aid granted by the Consultative Group on Indonesia (CGI). The doubts that have been raised over this huge debt are understandable. But these queries are themselves questionable. Here is why.

The debt is crucial for the deficit. Essentially, the government has secured funds that would help finance a huge portion of next year's operations. The amount pledged by the various nations and institutions, represents about a third of the 2001 deficit. Hence the size of the loan is no small amount.

The biggest worry has been over the huge reliance on foreign loans. Indeed the external debt is as large as the Indonesian economy. The government owes the world two-and-a-half times the amount it has in reserves at the moment. External public debt is around Rp 75 billion while reserves are around Rp 29 billion.

The private sector's bill is larger than all the goods and services exported last year. Corporate debts are around Rp 69 billion while exports for 1999/2000 were Rp 55.2 billion. The budget's interest payment on foreign debt is as large as the actual fresh loan portion of the CGI aid of Rp 20 trillion. Hence the natural concern among many over this debt situation.

However at the moment, Indonesia has no other choice. Among the three sources of funding for the 2001 deficit, the CGI money represents the most "feasible" option.

The upcoming deficit is projected at Rp 52 trillion. This will be met through privatization proceeds (Rp 5 trillion) and asset sales (Rp 27 trillion) of the Indonesian Bank Restructuring Agency (IBRA) with the balance coming from the CGI aid. But as it stands we are not too confident with the first two sources if this year's track record is anything to go by.

Even by September, the government had not collected any privatization receipts at all. The lack of interest in state- owned enterprises was supposedly due to poor investor confidence.

As for IBRA, it is noted that some Rp 12 trillion out of Rp 18.9 trillion has been raised so far. To meet and even surpass this target, structured loans worth Rp 8 trillion will sold be shortly. But at a similar auction this year, only Rp 680 billion was raised, though the recovery rate on the sale was 70 percent. Like the privatization bottleneck, investor confidence will be key for IBRA sales this and next year.

Thus until investor confidence picks up, we have to rely on foreign loans as a sure source of funding.

This is why we cannot entertain what ex-finance minister Bambang Sudibyo suggested in The Jakarta Post yesterday -- that "as an alternative to this (CGI) loan, the government could push its privatization efforts and sale of IBRA assets".

Reliance on foreign loans is bad for the long-term. However as a short-term measure it is acceptable. This is really part and parcel of the assumptions underpinning the existing program of the International Monetary Fund (IMF) now in force. That is, despite the outward appearance of ratios and figures, which suggest indiscipline, it is the government's commitment to address this which will be more crucial.

It is noted that net foreign financing meets 42.4 percent of this year's deficit while for next year, this item will occupy 38.6 percent. Hence it is not as if the Indonesian government is not trying to restrain itself. Also Indonesia is striving to improve its external debt position by targeting 80 percent (from the present 100 percent of gross domestic product) as its next stop.

Some had also suggested that the CGI aid was not really essential as the budget could be reworked to raise more money. One way would be to raise the oil price and exchange rate assumption made in the budget (this may raise about Rp 12 trillion).

This may be possible. However we forget the other side of the equation. Any gain obtained by raising the price/rupiah numbers would be eroded by higher expense on subsidy and servicing of foreign debt. The net effect would be to fall short of the necessary money.

It was also suggested that what would have been ideal in terms of these foreign negotiations would be debt write-offs. In fact prominent Indonesian non-governmental organizations had even traveled to Tokyo to plead this case. However quite understandably this was not granted. Discounts in size of debts are really huge prizes given away. Many doubt if Indonesia had done enough in the way of reforms to qualify for this.

This is perhaps the real lesson from Tokyo. That, Indonesia has done just enough in reforms to get by but not enough to please others so much that they would hand out the ultimate prize.

To use an analogy, Indonesia grabbed the silver medal in Tokyo but missed out on the gold.

It is not as simple as it was made out to be by some legislators who argued that Indonesia should have came back with reduction in outstanding sums or simply "haircuts". Indonesia is not in an economic bracket low enough to argue for this persuasively.

But Indonesia may get such discounts from her friends if they feel she has done enough for them to go back home and convince their governments. To justify such a huge loss to themselves, donors must be able to explain why to their governments and parliaments. Hence it is up to Indonesia to help itself.

So never mind for now if Indonesia didn't get the top prize. Bringing home any medal is to be welcomed -- for it was not too long ago that Indonesia seemed destined to lose everything.

The writer is an emerging markets analyst at Standard and Poor's MMS in Singapore.