IMF predicted to set tough conditions for Indonesia

IMF predicted to set tough conditions for Indonesia

HONG KONG (Reuters): Indonesia must brace itself to accept
tough conditions for aid as talks go on with the International
Monetary Fund (IMF) in Jakarta, analysts said.

A headline-grabbing sacrifice, most likely of the national car
program, and some tough economic reforms that strike at the heart
of Indonesia's government-banking-business triangle are likely to
accompany a standby facility of between US$5 and US$12 billion,
they said.

"The need to implement a rescue package brings into question
the balance of power between different interest groups within the
government," William Keeling wrote in a Dresdner Kleinwort
Benson (DKB) research note.

"If resolving the current crisis requires a break in the
mutually self-serving relationship of government and business,
then a new style of government must emerge to take Indonesia
forward. This could be politically problematic."

Abandonment of the national car program, the national jet,
fuel subsidies and key monopolies are likely to accompany IMF
demands for immediate insolvency of at least a dozen banks.

More importantly, demands for a more independent supervisory
role for government are also expected in a country known for
extensive political involvement in the corporate sector.

Although the IMF is known to be vigilant in how its cash is
disposed, analysts stress that Indonesia's economic crisis is a
private, corporate sector debt problem -- and that will pose
difficulties for the IMF.

Just as there is a distinction between private and public
finance in Indonesia, so there is a distinction between export
and domestic business.

Exporters were believed to be in better condition given their
natural hedge against foreign-denominated liabilities. But
domestic-oriented conglomerates, including some of the country's
biggest names, could be in serious trouble.

"If the worst-indebted of the private companies are among the
politically best-connected, then the process of resolving their
debt obligations becomes highly sensitive," Keeling wrote.

"The weakness in the currency reflects concern that high-
profile conglomerates are among the worst indebted and that the
government may not have the political will to confront them."

Suspensions are forecast in some of the largest, listed
conglomerates in order to ringfence their best assets, confirming
the urgency of the situation.

Up to $10 billion in very short-term debt and US$5 billion in
one-year debt is expected to mature in the next three months, up
to half of which will not be renewed.

This implies principal repayments on the remainder amounting
to 1.1 percent of gross domestic product per month, DKB said.

Compounding these problems is the absence of insolvency
legislation in Indonesia. This will require the government to act
by fiat to seize assets, testing its commitment and putting
pressure on the IMF to enforce conditions.

Given Indonesia's inbred corporate structure, DKB suggested
the IMF consortium would require the government to take over
entire groups rather than individual companies, choosing which
ones should be rescued and which should be allowed to fail.

"To do otherwise would be to bail out the most profligate of
the private entrepreneurs," Keeling wrote.

"There will inevitably be room for preferential treatment
which will be contentious but unavoidable. This increases the
need for the IMF consortium to set the terms of reference for
enforcing the insolvency of private companies before approving
the standby facility."