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)