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.