Delaying bank reform 'depletes confidence'

Delaying bank reform 'depletes confidence'

The International Monetary Fund's Asia Pacific director Hubert
Neiss spent the past week reviewing implementation of the
Indonesian economic reform program. Before leaving for Paris
yesterday, Neiss discussed with The Jakarta Post new developments
in the IMF-sponsored reform program and the state of the
country's economy.

Question: Many of the measures in the April bank restructuring
program seem to have fallen behind schedule. How does this affect
market sentiment on the rupiah? What are the new schedules for
the various points in the banking restructuring agenda?

Neiss: If banking reform falls behind schedule, it has a very
serious, bad effect on confidence of the people and investors.
This will influence the rupiah.

Therefore, in this review we have agreed that action will be
taken soon. All the plans have (been) worked out, everything is
there. Now it's only a matter of putting them into action.

The April commitment fell behind schedule because of
interruption of the riots and the formulation of the new
government. But now the situation is normalized again and now
it's time for action. The government will soon announce its
plans.

But we'll have to see whether this bank restructuring will go
smoothly because there are a lot of vested interests involved
that may try to delay the programs. All these have to be
overcome.

The President has said that he will firmly support IBRA (the
Indonesian Bank Restructuring Agency), no matter who will be
affected, as long as banks are restructured according to the
plans, because the economy needs a healthy banking system. This
is very urgent business.

Q: What will be the action on the six audited banks currently
under IBRA management? Will there be any further bank
liquidation?

N: Actions on these banks will come soon. There are various
possibilities. Some can be sold if there are buyers interested,
while some can be merged or recapitalized by their owners.

There are cases where closing down banks may be unavoidable.
If the bank is very badly managed and insolvent, nobody is
interested to put capital in and it can only be kept alive by
Bank Indonesia liquidity credit day by day, in this case the bank
has to be closed down.

Out of the six audited banks (Bank BDNI, Bank Umum Nasional,
Bank Tiara, Bank Danamon, Bank PDFCI and Bank Modern), it is
possible that some would have to be closed down. IBRA will make
the decision after carefully examining all possibilities.

There's still a lot of things that can be done before closing
down banks. IBRA, for instance, will soon launch its asset
management unit which will take over bank bad assets. Once the
bank can get rid of the bad assets, they will become healthy. So
closing down a bank will be the last resort.

But in closing down a bank, people must be carefully informed.
They have to be assured that their deposit money is safe. The
deposits are just transferred to another bank. The only
inconvenience for them is that they would have to go to the other
banks to get their money. But they can cash in their deposits
the next day.

So people must know this information. This is the kind of
public relations exercise, which was not done in the case of
closing down 16 banks in November, which created a bad
psychological impact. It could have been handled more carefully.

Q: The IMF has recently disbursed US$1 billion in standby credit
to Indonesia, supposed to be used to strengthen the country's
balance of payments. But officials have confirmed that the loan
will be used for importing basic staples. Could you enlighten us
on this new disbursement?

N: The IMF money goes directly to Bank Indonesia to be included
as part of its foreign exchange reserves. BI can then supply
these reserves to the market where it is picked up and used to
finance imports.

The IMF has a target for BI to maintain a certain level of
foreign exchange reserves which is important for confidence. But
beyond this level, BI can supply these reserves to the market,
like for imports. This is also important to stabilize the
exchange rate as there will be a steady supply of forex to the
market.

This process will not happen only with the IMF money, but also
with the other part of the $6 billion support money that will
come in before the end of this period (1998/1999 fiscal year).

Q: Since the "reform" government has recorded impressive
performance in fulfilling the reform measures set in the
agreement with the IMF, why has the fund has not decided to make
a quarterly disbursement of the full $3 billion tranche, as
originally agreed in November, instead of a monthly $1 billion
installment. How long is this "probation" period before the
normal quarterly disbursement is restored?

N: We have changed the agreement to a monthly disbursement, which
is $1 billion for each month. This also means $3 billion for a
quarter. We will continue this disbursement at least until
November. So there's a lot of money to be disbursed.

The change also reflects a period of intensive monitoring
review. Instead of waiting for a quarter where many things can
happen, creating a completely new situation and changing
everything, we decided to make the review every month, which is
easier, including for making adaptations to the program. This is
still a very intensive, initial difficult period. But the amount
of the money is the same.

Q: The IMF is supposed to serve as a catalyst for other creditors
joining the November bailout program. But the fund's endorsement
of Indonesian performance lately failed to unlock other loan
commitments except those from the World Bank, ADB and Japan.
What is the issue now?

N: We have actually unlocked further commitments, including $300
million from Australia and China, and from all countries of the
Paris Club which agreed to reschedule the debt principal payment,
which is as good as giving more money.

We haven't so far persuaded Singapore to disburse its
commitments to provide a trade financing guarantee. This is
because the details have yet to be worked out.

Q: The amended 1998/1999 State budget projects an official
capital flow of $19.4 billion but a net private capital outflow
of $11.3 billion. Does this mean investor confidence is not
expected to return until late next year?

N: I don't think investor confidence has anything to do with
that. Investor confidence depends on how the economic situation
develops, how well the government implements policies and how
stable the political situation is.

Q: As most of official borrowing this year and perhaps until next
year will go toward the operating budget and not new investments
to increase income-generating assets, don't you think the public
sector's foreign debt will explode to an unmanageable level
within the next two to three years?

N: No. Because while the budget deficit will be very large this
year, it will gradually come down, and then the economy will
start growing again. Then it will be easier to resolve the debt.

Q: Do you think Indonesia needs to ask for a complete debt
rescheduling to the Paris Club creditors grouping?

N: I don't think it is necessary for Indonesia. The Paris Club
has offered a rescheduling of principal payment and that's what
most countries think is the appropriate way. This brings a
relief for this year.

Q: What about the proposal to reduce the corporate foreign debt?

N: Yes, I agree with such a proposal. But this has to be
negotiated between individual creditors and debtors. The
government and the IMF cannot intervene.

They have to sit down to see what's reasonable, which in some
cases it's reasonable to reduce the debt. Otherwise, the
corporation cannot manage it.

In some cases, the debt is too big for the corporation to have
a normal operation in the long run. And if the corporation
cannot get back to normal operations, it doesn't earn any money
and cannot pay the debt. So it's more reasonable to reduce the
debt and pay than to break down and everything is lost.

Once debtors and creditors have agreed on this. They can enter
the debt scheme of INDRA (Indonesian Debt Rsestructuring Agency)
which guarantees the forex availability.

Q: Why did you endorse the export ban on certain basic
commodities, which contradicts the IMF reform program?

N: You have to distinguish between the medium and the short-term
targets. The IMF economic reform program is a three-year
program. You may have a certain target in the medium term, but
in a short-term emergency situation you have to suspend the
target, and deal with the emergency situation.

So the export ban is a very short-term measure, probably two
to three weeks. After that there will be an export tax, which
has the same effect, but it's more flexible. As the situation
improves, the tax can be lowered gradually. And after three
years, maybe we'll have free exports of commodities.

The ban is necessary because of the very big difference
between certain domestic food prices and foreign prices. If the
difference is too big, like in the case of cooking oil where
the international price can be twice the domestic price, people
will start exporting them to make more money. This will create a
tight domestic supply and an increase in the prices. This cannot
be tolerated. The export ban is an unavoidable emergency measure.

The export tax has yet to be decided, but it must be big
enough to cover the price differential so that it'll be no longer
attractive to export.

Q: How do you see Indonesian economic prospects?

N: In Indonesia we're still in a very serious initial process of
foreign exchange crisis.

The most difficult barrier is to reestablish confidence of the
Indonesian and foreign investors. Once the confidence is there
the exchange rate will appreciate, which is the key for a
recovery.

The political factor plays an important role to bring back
confidence. Indonesia went through a period of greater domestic
political uncertainty. This makes the difference with Thailand
and South Korea. (rei/prb)