Investment climate key to recovery: BI

Investment climate key to recovery: BI

MELBOURNE (Reuters):Indonesia's central bank acting governor
on Monday declared that improvement in the country's investment
climate was key to a sustainable recovery for its economy.

"We are very serious about improving the investment climate.
For sustainable growth we need this," Anwar Nasution told Reuters
in an interview at the World Economic Forum.

Nasution also said Indonesia's International Monetary Fund
(IMF) program had evolved to the point where the government was
taking the initiative, ensuring a fairer distribution of the cost
of reform and an increasing political commitment to change.

"In contrast with the past, it's become a more homegrown
program. And because it's homegrown, there will be more
determination to implement it," he said.

Jakarta last week signed a new letter of intent to the IMF,
which contained few major changes and paved the way for a new
$400 million loan from the fund later this month.

After contracting by some 14 percent at the height of the
crisis in 1998, the Indonesian economy has rapidly recovered, to
the point where the government expects growth next year of up to
five percent.

But economists say the improvement is based largely on
consumption and could quickly stall if foreign and domestic
investors do not return.

Nasution blamed political uncertainty and speculation for the
recent decline in the rupiah, but expressed confidence the
currency would stabilize and appreciate gradually against the
U.S. dollar to about Rp 7,500 by the end of the year from around
Rp 8,400 now.

He said the nation had had to deal with the twin crises
arising from the transition to democracy and to less centralized
government, but longer term these changes would yield positive
results.

"Once we solve this, we will have much stronger fundamentals,"
he said.

"By giving authority to eastern parts of Indonesia, they can
more easily exploit the market potential in other regions like
Australia."

Nasution also dismissed market speculation that the government
would introduce new controls to curb foreign exchange
speculation.

"We will stick to the IMF letter of intent for a floating
exchange rate system," he said, adding that the government did
not have the capacity to change the rules in any case, given the
weak banking system.

However, he expressed confidence that the restructuring of the
banking sector, a critical element of the IMF-led program, would
pick up pace.

"I'm very optimistic. Scandals like Bank Bali are already past
history so now we can move forward at a much quicker pace," he
said, referring to the case in which Bank Bali has been accused
of paying a whopping recovery fee of 546 billion rupiah to a
company with close links to the then ruling Golkar Party.

Nasution said while domestic interest rates were gradually
coming down, progress had been hampered by the lack of a
secondary market for government bonds.

"Gradually we can develop the secondary market and then we can
reduce the pressure on interest rates in the interbank money
market," he said.