IMF likely to increase bailout for Indonesia by $1 billion

IMF likely to increase bailout for Indonesia by $1 billion

HONG KONG (Agencies): IMF Asia-Pacific Director Hubert Neiss said on Wednesday he expects the IMF's Indonesia board to agree to augment an existing bailout program by about $1.0 billion when it meets on Thursday.

"I would expect the board will agree," Neiss said at a Credit Suisse First Boston Investment conference.

Jakarta pledged last week to press ahead with bank reforms in a letter of intent with the International Monetary Fund, which has led a more than $40 billion international package to rescue Indonesia from its worst economic crisis in three decades.

Neiss said the IMF disbursement would probably match the $1 billion in extra funding Indonesia received last year.

Indonesia could not yet expect the type of capital inflows that South Korea and Thailand have recently enjoyed, he said.

"Therefore Indonesia in the short run is dependent on official inflows," he was quoted as saying by Reuters.

The letter of intent, required before the IMF will release any more money, followed Indonesia's long-delayed announcement to restructure its sick banking sector.

Last month's surprise delay in bank reforms clearly infuriated the IMF and sparked accusations that the Jakarta government was buckling under domestic political pressure.

Neiss said he expected Indonesia's June 7 general election to proceed as planned despite worsening violence in parts of the archipelago.

Politicians and analysts have said the election might have to be delayed or canceled if the violence, which has claimed hundreds of lives, was not brought under control by the time campaigning started in late May.

"The main impact of the violence is human suffering and loss of human life," Neiss said. "That's the most important consequence."

But if it leads to broader disorder, the IMF's economic program could be affected, Neiss said.

In an interview with Dow Jones Newswires on Wednesday, Neiss said the IMF director said that recent market rumors that Indonesia was again flirting with capital controls are false, noting a statement from Bank Indonesia late Monday to that effect.

"Forget about it. They're just rumors," he said. "The central bank is developing a system of monitoring capital flows, which we think is a very good thing," Neiss said, suggesting that is the source of rumors. "Monitoring means that you get very precise data on in and outflows, and you can recognize it at a very early stage."

The IMF official also reiterated his view that the rupiah is undervalued, from a long-term perspective. He said the currency probably would have strengthened more than it did after a bank closure announcement two weeks ago, but "security issues" of unrest in the country and election concerns have probably damped the market's enthusiasm.

"Over the long run, yes, the rupiah is still over- depreciated," he said. "(We) always have some idea of what is a reasonable range. The rupiah is still below that band," he said, declining to provide his own assessment of fair-market-value.

Neiss also said that the agency's three Asian program countries are unlikely to need to draw on the credit lines made in 1997 by other governments, and called a second line of defense.

Neiss said that Indonesia is the most likely country to require that money, pledged by other countries to bolster the funding promised by the IMF, World Bank and Asian Development Bank in the 1997 programs.

But even in Indonesia, Neiss said, he doesn't see the need arising. For South Korea and Thailand, where the other money is called parallel financing, he said the need is "unlikely." He said, "the money now is not that important because the countries have replenished their reserves."

"Indonesia will slowly improve and not fall back into a crisis similar to October and November 1997," he said.

The second-line money is meant to stabilize the country in the event of an unexpected new crisis that causes the country to again lose its foreign exchange reserves. "It's like an insurance policy," he said.

The director of the IMF's Asia-Pacific department said that the IMF is only one influence on these countries to continue their reforms.

Therefore, markets shouldn't be overly concerned if the IMF money is dwindling since market forces, creditor banks and other multilaterals will continue to lead the countries in the direction of reform. In addition, he said, the governments themselves are committed to reforms.