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."