Indonesia investors get no boost from IMF talks

Indonesia investors get no boost from IMF talks

WASHINGTON (Reuters): Global investors looking for the International Monetary Fund to shore up crumbling confidence that Indonesia's economy can pull through its protracted crisis got no such assurances at the fund's weekend spring meetings.

Hopes of swift progress sank after a planned high-level Jakarta delegation to Washington, that had included the finance minister and central bank governor, was trimmed back to a single deputy central bank official.

And instead of words of encouragement, IMF Managing Director Horst Koehler piled on the pressure, insisting political stability in Jakarta had to come before fresh cash.

That dashed any prospect that a stalled $5 billion IMF loan program -- seen by foreign investors as crucial to promoting the political stability that will pave their way back into the country -- might have been restarted from Washington.

"For all practical purposes, foreign investors have got out of the markets of Indonesia and their interest is limited to the IMF and its role there," Paul Alapat, Asia regional economist at Nomura International in Hong Kong told Reuters ahead of the Washington meetings.

The IMF standoff effectively cuts off capital inflows and increases the risk of a fragile economic recovery imploding as fiscal burdens grow with the country's currency mired around 30- month lows near 12,000 to the U.S. dollar.

It even raises the prospect of a sovereign default.

"The potential for further currency instability means that the government may be forced either to tighten capital controls, or to consider sovereign default," Graham Parry, an economist with Lehman Brothers in Tokyo said.

He said Indonesia's fiscal deficit -- a bone of contention with the IMF -- will balloon as bank recapitalization bonds start to mature, while the sinking rupiah and rising interest rates add to a foreign debt burden that could rise to $7.6 billion next year from $5.4 billion this year.

Rupiah stability is crucial and with default seen as a last option, capital controls are a more likely near-term solution in the absence of political calm, Parry said in a client note.

But Achjar Iljas, deputy governor of Bank Indonesia, ruled out a shift from a free float on Monday.

"We do not think that way. For the time being I don't think we need to change the system. Our main problem is not there, are main problem is (politics)," he said.

"If the political situation improves then maybe we can give monetary policy a chance to work," Iljas said.

That hope looks increasingly futile with the likelihood that President Abdurrahman Wahid will face impeachment having risen after a second parliamentary censure over two graft scandals.

Rather than restoring stability, the censure pushes the economy nearer to the edge of a precipice.

Neighboring nations are already wary about contagion.

"We have a contingency plan this time," Thailand's central bank governor, Chatu Mongol Sonakul, told Reuters. "Indonesia has great problems and something could happen."

Exactly what is uncertain, but few expect a dash for Asia's exits on the same scale sparked when Thailand was forced to devalue its currency in mid-1997 -- a move that set off a financial crisis that swept through Asia and around much of globe.

Foreign investors never returned to Indonesia on the same scale as they did to Asia's other crisis economies like Thailand and South Korea, which made far faster progress on reforms, limiting the risk of rapid fund outflows from Jakarta and insulating neighbors from contagion should crisis strike.

David Robinson, deputy director of economic research at the IMF, says a greater risk to Asian economies comes from a steeper- than-expected U.S. slowdown than any regional shock.

But he concedes that while contagion risks in the region have diminished, fallout from a hypothetical Indonesia meltdown would be inevitable.

"In terms of direct linkages, we would see some effects for some of the ASEAN (Association of Southeast Asian Nations) countries...the political and social consequences worry me as much in terms of contagion from Indonesia," he said.