Indonesia's donors give up on Habibie

Indonesia's donors give up on Habibie

By Andrew Marshall

JAKARTA (Reuters): The International Monetary Fund (IMF) and World Bank decision to suspend new lending to Indonesia means they have given up on the government, but not on the country.

"This is a signal that they are waiting for the next administration. They are not prepared to deal with this one any more," said Neil Saker, economist at SG Securities in Singapore.

"Everybody is expecting Indonesia will continue to get donor aid. The calls to cut it off have been half-hearted. When we see a new administration we can expect lending to resume."

The World Bank and IMF have been grappling with corruption in Indonesia for years.

But they have lost patience over a new banking scandal which centers on a payment of more than US$70 million by PT Bank Bali to a leading official in the ruling Golkar party to recover loans from the Indonesian Bank Restructuring Agency.

President B.J. Habibie has denied opposition charges that the money was being plundered for his re-election war chest.

Now, desperate to avoid another Russia, where critics say billions of dollars in official international aid have been wasted, the two international agencies are turning the Bank Bali scandal into a test case for keeping Indonesia clean.

But given the risk of pushing Indonesia into economic and political chaos if loans are cut off for good, donors are not expected to punish the country itself for too long.

The IMF and World Bank clearly hope November's meeting of Indonesia's highest legislative body, the People's Consultative Assembly (MPR), elects a new president and sets the scene for a new regime in Jakarta.

This is something that looks increasingly likely as Habibie's support ebbs over Bank Bali and the crisis in East Timor, where the army-backed slaughter of independence supporters has forced Indonesia to bow to international pressure for a United Nations peacekeeping force.

IMF Asia-Pacific Director Hubert Neiss insists that reports in the Bisnis Indonesia newspaper that he was "disgusted" with the government and no longer trusted its economic team were wrong. But economists believe he has lost patience.

Habibie's numerous problems are seen as actually market positive, as they increase the likelihood of a new government.

"The threats are made upon the existing government and are unlikely to be valid should November's MPR session produce a credible new government, the probability of which is high," said Ferry Yosia Hartoyo, head of research at Vickers Ballas Tamara.

In the longer term, therefore, new loans are not under threat, especially because of the danger of pushing Indonesia into default and forfeiting the tens of billions already lent.

"The question is who will be at fault if Indonesia is forced to default on its sovereign debt service payments," Hartoyo said.

"And could the IMF and World Bank allow the ongoing recovery to stall? We think not, given the adverse contagion impact it could have on the region."

But Indonesia will still need to get through the next few months without fresh foreign loans. A loan tranche of around $450 million due from the IMF in October will now be on hold, and the World Bank has yet to disburse any of the $1-1.5 billion it plans to lend Indonesia in the year to end-June.

The Paris Club has also put off discussions on further debt rescheduling to next year. In response, Standard & Poor's has put Indonesia on CreditWatch with negative implications.

Central bank governor Syahril Sabirin said last week Indonesia had enough foreign exchange reserves to survive a loan suspension.

"At least we could make it for one or two months until a new government is formed," he said, although he has since conceded a loan delay would be damaging.

The rupiah, now around 8,000 to the dollar, was hit by news of the loan suspension, but the impact was muted as it was widely expected and not seen as a permanent end to lending.

Indonesia's thinly traded Eurobond issue due 2006 was quoted at around 635 basis points over U.S. Treasuries, versus 600 last week. Its best level this year was 542 points.

Analysts said that while the economic effects of the loan suspension were manageable, it was likely to further pressure the rupiah and foreign investment.

"Overall the rupiah will be under pressure," said the head of treasury at a foreign bank in Jakarta. "There will be an impact on foreign investors, who rely on the IMF to provide a lead. We could see capital flows dry up further."