Thu, 19 Feb 1998

Germany's appeals against CBS plan

JAKARTA (JP): German Finance Minister Theo Waigel has said he fully understands Indonesia's objectives in introducing a currency board system (CBS) to stabilize its currency, but that such a system is not viable at this point in time.

Waigel said yesterday a CBS, which would peg the rupiah to a fixed exchange rate with a foreign currency, was only good in the long term as the country did not currently fulfill the necessary requirements for such a scheme.

"There is no alternative to IMF reforms," he told the media after a meeting with President Soeharto and economics ministers.

"It is better for Indonesia to proceed with the reform programs agreed to with the IMF... there is no alternative to the IMF reform programs," Waigel said.

He cited huge foreign reserves, a sound banking industry, abolition of monopolies and adequate legislative infrastructure as some of the basic requirements for CBS operations.

The German finance minister arrived here yesterday as part of a tour that included South Korea and Thailand. He met immediately with Soeharto and Finance Minister Mar'ie Muhammad separately.

Waigel said Soeharto listened attentively to his views which also represented those of other members of the Group of Seven industrialized countries.

He added that German companies in Indonesia also were nervously waiting for firm implementation of the International Monetary Fund (IMF)-sponsored reform package.

In a related development, President Bill Clinton is defending the IMF rescue program for stabilizing and restoring Indonesia's economy to a sound, robust growth path.

"I think I'm making it quite clear that the president stressed to President Soeharto the importance of making a sustained effort that would lend credibility to the work the IMF is doing in the country," White House spokesman Mike McCurry was quoted by Reuters as saying in Washington.

President Clinton spoke to Soeharto Friday night by telephone to add his voice to a chorus of IMF and other international opposition to a Hong-Kong style currency board for the rupiah, fearing it would send Indonesia's economy into a tailspin.

"The president did discuss the currency board, among other topics," McCurry said. "There are a lot of complexities and technical issues that have to be addressed before we think a currency board would be feasible."

Treasury Secretary Robert Rubin on Tuesday also urged Indonesia to remain faithful to IMF reforms in order to win back investor confidence in its financial future.

In comments to reporters following a speech in Washington, Rubin said: "I think what you need in Indonesia is... a sustained implementation of a (IMF) reform program, sustained over a sufficient period of time and with enough evidence of commitment so that international financial markets have enough confidence in the institutionalization of that regime."

IMF managing director Michel Camdessus has already warned that its 43-billion-dollar rescue package for Indonesia could be jeopardized if Soeharto persists with plans to create the currency board.

Rubin said the abolition of monopolies controlled by politicians, an end to subsidies on basic commodities and a financial sector overhaul was the best way to restore confidence in the economy and the currency.

In Tokyo, a delegation of Japan's ruling Liberal Democratic Party which just returned from a visit to Asia said in a report yesterday that the establishment of a currency board for the rupiah would not be appropriate at the moment.

The report said the delegation met Foreign Minister Ali Alatas and exchanged views on the possible establishment of a currency board system in Indonesia.

"We pointed out that the currency board system would not be appropriate for Indonesia at the moment," the report said.

It added that the delegation told Alatas that Indonesia should consult fully with the IMF and other nations, such as the United States and Japan, before implementing the system.

In New York, U.S. credit rating agency Moody's Investors Service said on Tuesday that a CBS would not address Indonesia's underlying problems.

Jakarta will need to deal with a massive stockpile of corporate debt, a deeply troubled banking system and shattered confidence in the country's finances, which would not be cured by the implementation of a currency board, Moody's analysts told investors in a teleconference.

"It doesn't address the underlying problem that Indonesia faces," said Vincent Truglia, managing director at Moody's. "This is why you're seeing so many critics of an Indonesian currency board at this time under these circumstances."

The establishment of a CBS would not change the fundamental factors behind the severe loss of confidence in Indonesia's financial markets, Moody's said.

"Without these underlying factors being addressed, the currency board system would do little to prevent further capital outflow, thereby causing a period of very high interest rates and further problems with the banking system," said Steven Hess, senior analyst at Moody's.

The operation of a CBS would also appear to be incompatible with Indonesian government guarantees to support bank deposits, Hess said. (rid)