Forecasts on Paris Club deal mixed

Berni K. Moestafa The Jakarta Post Jakarta

Confidence is running high as Indonesia gears up to meet the Paris Club over debt talks this week, but some fear the government may be asking too much in its bid to reschedule around US$5.5 billion.

Indonesia hopes to defer debt payment of some $5.5 billion in a meeting with official creditors at the Paris Club this Thursday.

"The chances are good for Indonesia," Standard Chartered Bank economist, Fauzi Ichsan told The Jakarta Post over the weekend.

Government officials have been saying the same.

Minister of Finance Boediono toured several creditor countries last month to gauge their support, and returned visibly upbeat.

A string of good news -- the sales of state assets, steady reform progress and a relatively stable political outlook - has ushered Indonesia into its meeting with the club.

Japan and the U.S. have indicated support for the meeting, furthering hopes of a successful deal.

But the main reason for their support has been the backing of the International Monetary Fund (IMF), Fauzi said.

Under an IMF-approved program, the government is undergoing economic reforms that, albeit slow, have seen steady progress.

The reform targets are tied to the IMF's loans, worth about $4.5 billion under a three-year program extended to Dec. 2003.

The IMF's last review in February gave the government credit for bringing its macroeconomics to better stability, and starting the privatization program.

Now the government is drafting an update on the progress made, on which hinges the next loan disbursement of $400 million.

Some of the reform targets had not been met. An official from the Japanese government, however, said that as long as Indonesia remained on track it would not hurt the Paris Club meeting.

"The general atmosphere is positive...based on the fact that Indonesia has made progress in meeting reform targets," said Hiroshi Ogushi, the First Secretary for financial affairs at the Embassy of Japan.

Against this backdrop comes Indonesia's request to defer payments not only of its principles but also its interest rate.

Indonesia will also likely ask for a debt-rescheduling period of more than 20 years, according to a government official.

The two previous Paris Club meetings granted Indonesia a debt rescheduling period of up to 20 years.

But here the government may be pushing too far and is unlikely to secure both targets, according to Fauzi.

"The rescheduling of interest rates looks OK, but asking for more than 20 years is questionable," he said.

These targets would have to be set against demands by the Paris Club for equal treatment on Indonesia's public debts to private lenders.

Rescheduling government debts to private lenders will downgrade Indonesia's country risk rating, making investment by a foreign company here expensive.

Ogushi said it was a policy of the Paris Club to demand the private lenders of a country to share the burden of debt rescheduling.

"We will come with that view at the meeting," he said.

But there is another risk if Indonesia fails to avoid the demand for equal treatment, said Dradjad Wibowo, an economist at the Institute for Development of Economics and Finance (Indef).

He said by tying the Paris Club to the presence of a working debt rescheduling deal with private lenders, it added the risk of Indonesia not being able to make use of the Paris Club deal.

The club's deal contingent is already working on the IMF program, meaning that without one the deal would no longer be in effect.

Securing a debt rescheduling deal with private lenders, Dradjad added, was normally difficult.

"Private lenders have simply other interests than public ones," he said.

If anything, Indonesia should compromise its request for a longer rescheduling period or deferred interest payments, he said.

The Paris Club ministerial meeting will be held on Thursday and Friday with technical meetings slated to begin on Monday.

Spokesman at the Coordinating Ministry for the Economy Mahendra Siregar said Coordinating Minister for the Economy Dorodjatun Kuntjoro-Jakti and Minister of Finance Boediono would leave for Paris late Tuesday.