Boediono optimistic on economy

Boediono optimistic on economy

Jerry Norton and Dean Yates, Reuters, Jakarta

Indonesia's finance minister expressed optimism over the economy on Friday, insisting the government was delivering on policy and changing perceptions about how investors view the world's fourth most populous nation.

In a rare interview, Boediono said the government did not want to seek another debt rescheduling with the Paris Club of official creditors after securing a US$5.4 billion deal last week.

But Indonesia would need close coordination with the IMF on economic policy when an existing $5 billion loan program with the Fund expires at the end of next year, Boediono added.

Indonesia has struggled to rebuild its economy and banking sector after being savaged by the Asian financial crisis in the late 1990s, which required an earlier bailout from the International Monetary Fund and other foreign donors.

"I think everybody's reading is that we have been experiencing a turnaround in psychology, perceptions and climate in the past few months," said the soft-spoken Boediono, respected by donors and foreign investors alike.

"We have been quite consistent in implementing what we say we are doing in terms of economic recovery. I think bit by bit, the public and the market seems to be giving us their confidence."

Indonesia's stock market has traded near two-year highs in recent weeks while the rupiah -- once one of the world's most volatile and unsteady currencies -- has appreciated around 10 percent against the U.S. dollar since the end of last year.

Boediono said increased confidence was also evident among creditor nations at the Paris Club meeting on Indonesian debt although all-night negotiations were involved.

"Right from the outset we sensed general support for our program but of course because we requested extra" it took some lengthy talking.

Analysts generally agree Indonesia got exceptionally good terms. Creditors "were quite comfortable with the way we were implementing our economic program," Boediono said.

He said Indonesia's gross domestic product should grow at least four percent this year and five percent in 2003.

While four percent this year is in line with the budget, the Asian Development Bank has predicted growth of just three percent. Growth in 2001 was 3.32 percent.

Boediono was more optimistic than some analysts about consumer spending, the critical engine of economic growth last year, continuing strong until a recovery in export demand kicks in from a hoped-for U.S. and global economic recovery.

"I think for this year consumption spending will still be a significant factor...I think the tapering off will come but it may not be until next year," he said.

For the next several years, Boediono added, annual growth should be between five and six percent.

That might not be optimal but should be enough to cope with critical challenges like keeping unemployment from mushrooming and avoiding the creation of artificially high levels or "bubbles" in the share and property markets, he said.

Asked if the recent gains in Indonesian share prices and the rupiah currency were justified by fundamentals, Boediono said: "Definitely yes. All our assets are underpriced".

While declining to specify a level he also said he personally saw room for further rupiah appreciation without any need for tightening the country's monetary stance.

Interest rates could move lower, Boediono said, toward 14 percent for benchmark Bank Indonesia three-month certificates (SBIs), now over 16 percent.

One factor that has cut some slack for Jakarta's financial markets was last week's agreement by the Paris Club of official creditors to reschedule more of Indonesia's huge foreign debt, the third pact since the late 1990s.

Boediono said the government did not want another.

Indonesia is burdened with total foreign debt of some $140 billion, around the same as annual GDP.

"Our desire is not to go back (to the Paris Club) but certainly of course it depends on our performance and the overall situation at the time," Boediono said.

Asked how long Indonesia needed an IMF program, he said:

"Close coordination with them in terms of our economic policy will be needed beyond 2003" when the current program expires. He declined to be drawn on details.

Boediono also said he did not see much impact from a likely downgrade by Standard and Poor's of Indonesia's sovereign credit ratings to "selective default" due to private debt affected by the Paris Club deal.

S&P has said such a downgrade was imminent over Jakarta's plans to reschedule $340 million in official debt owed to private creditors per a pledge to the Paris Club to seek comparable treatment from that sector.

Private creditors were being contacted about that proposal now but a meeting of the London Club, the private creditor equivalent of the Paris Club, on the issue may still be some months away, Boediono said.

The government is trying to move back toward the black by, among other things, collecting billions it is owed by former bank owners who got emergency loans in a largely failed attempt to shore up the troubled sector at the height of the Asian financial crisis in the late 1990s.

Boediono warned the bankers the government meant business in a new scheme being devised to collect the cash.

"It's backed by rather solid political support from within the government and the legislature. I think the most important thing is this political resolve or political will, which was not there before," Boediono said.

"We mean business when we say that we will give penalties."

A higher recovery rate on the debts is seen as critical both to satisfy the IMF and creditors and to help plug a budget deficit targeted at 2.5 percent of GDP this year.

Boediono also played down concerns a delay in issuing the country's first treasury bills, the proceeds of which will be used to refinance bank recapitalisation bonds maturing this year, would hurt the budget.

The T-bills auction could be conducted by July as parliament was expected to approve a sovereign securities law by then, he said.

The cash-strapped government would also end up posting a lower actual budget deficit for last year than a targeted 54 trillion rupiah ($5.74 billion) or 3.7 percent of GDP, Boediono added. He gave no figures.