Govt says economy set to bottom out

JAKARTA (JP): Indonesia's crisis-hit economy should bottom out in the first semester of the next fiscal year beginning in April after shrinking by an estimated 16 percent in the current 1998/1999 fiscal year, the government said Tuesday.

The government also said in the supplementary memorandum of economic and financial policies, a new letter of intent to the International Monetary Fund (IMF), that inflation, running at an estimated 66 percent in the current fiscal year, should moderate to within a range of 15 to 20 percent in 1999/2000.

"Our central projection is for the real gross domestic product in 1999/2000 to be virtually unchanged, based on the expectation that the economy will bottom out during the first half of the fiscal year, and that a modest recovery will begin thereafter," the letter said.

But it warned that a number of domestic and external risks applied to the outlook, and the macroeconomic framework would be reviewed regularly to ensure that policies remained consistent.

The government said it remained committed to pursuing a tight monetary policy to stabilize prices and reduce the volatility of the rupiah. It targeted a maximum base money expansion of 14 percent in fiscal 1999/2000.

In the fiscal sector, the government would continue with its expansionary budget in order to stimulate growth.

The budget deficit for 1999/2000 is projected to reach 6 percent of the GDP, assuming that the rupiah averages at Rp 7,500 per U.S. dollar and the government collects $1.5 billion from its privatization program.

"The budgetary framework for 1999/2000 is critically dependent on the timely availability of external financing," the government says, adding that it hoped to get additional official external support of about $5 billion to plug the budget deficit.

The government also said that, in an unexpected development, further privatization of international call operator PT Indosat had been delayed for one to two months for a variety of technical reasons.

So far this fiscal year, the government has concluded only two transactions totaling close to $200 million -- far behind the targeted $1 billion -- through the sale of shares in cement maker PT Semen Gresik and food giant PT Indofood Sukses Makmur.

"The privatization program has fallen behind schedule this year, principally because market conditions remain unfavorable," it said.

As the budget revenue situation had become "a source of considerable concern," the government said it would likely raise excise taxes on selected commodities, reduce tax exemptions and make more goods subject to value added tax.

Nevertheless, the government said the 1999/2000 budget would not be affected by the fiscal decentralization legislation currently being deliberated by the government and the House of Representatives.

This legislation adopts careful sequencing of decentralization reforms, with administrative and expenditure decentralization preceding revenue assignments.

On international trade, the government believed Indonesia's balance of payments in 1999/2000 should improve steadily, with export growth contributing to a "somewhat larger" external trade surplus.

With that surplus, coupled with incoming official funds, the country's gross external reserves are expected to increase to a "more comfortable level" of around US$29 billion -- compared to the $24 billion level now.

To restore foreign investor confidence in the country, the government said, it would continue with its bank restructuring measures, help solve private external debt hangover and improve legal structure.

The government decided on Saturday to close down 38 domestic private banks, nationalize seven, recapitalize nine others and let 73 relatively healthy banks continue operations.

It promised to complete the recapitalization process for the nine banks by June 30.

"Thereafter, there will be regular six-month reviews of all banks to ensure their continued compliance with the highest prudential standards, with audits by international accounting firms for the foreign exchange banks," it said.

To help solve the debt overhang, the government expected an agreement with external private creditors to be reached on a second interbank exchange offer to cover debts falling due during the 1999-2000 period.

The government would also continue to encourage creditors and debtors to settle their debt overhang through the Jakarta Initiative or the Indonesian Debt Restructuring Agency.

It promised to amend the bankruptcy law and appoint by March 25 ad hoc judges to the commercial court to improve the credibility of that court.

The government will also submit legislation for the registration of security interests that will give certainty concerning the priority rights of creditors.

It will also make recommendations in consultation with the private sector to strengthen securities regulations, stock exchange listing requirements as well as company and accounting laws. (rei/rid)