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."