Aid from donors vital for deficit

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.