Investors fret over Asian verdict on RI
Investors fret over Asian verdict on RI
NEW YORK (Reuters): U.S. investors are closely watching how Asian markets will respond this week to Indonesia's temporary debt freeze and bank reforms.
The momentous announcements by the Indonesian government on the eve of long Asian holidays were seen by traders and fund managers as deliberately timed to blunt the impact of the "voluntary temporary freeze" of debt payments.
"The trading was very thin," said one trader who was not reassured by the firming prices of Indonesian stocks and the rupiah's bounce following the announcement on Tuesday.
A serious concern centers on the Indonesian government's pledge to guarantee commercial bank deposits and loans, U.S. experts said.
The Indonesian central bank will come under strong pressure to print money to keep the payments system working, they said. They noted that this would risk violating the austerity guidelines prescribed by the International Monetary Fund as a condition for the $43 billion bailout.
The accommodative monetary policy would lead to inflation, which in turn would further weaken the currency.
David DeRosa, and independent consultant and adjunct professor of international finance at Yale University, said that high interest rates would push more business into bankruptcy and fan social unrest. He also said nations throughout Asia have "a strong proclivity" to circumvent IMF austerity programs.
"The IMF policy is designed to keep the currency stable with a restrictive monetary policy," DeRosa said. "We don't know to what extent that is enforceable."
The inflation rate under the revised Indonesian budget unveiled last week is 20 percent, but many economists forecast the rate would rise to as high as 35 to 40 percent.
Desmond Lachman, emerging markets strategist at Salomon Smith Barney, said the Indonesian framework for restructuring private sector debt was too sketchy to inspire full confidence. He noted that Indonesia's banking problems are more complicated than Korea's because more creditors are involved.
"It is hard to get cohesion from the vast number of creditors," he said.
Lachman also noted that the blanket coverage of bank deposits and loans was subject to abuse, leading to vastly larger liabilities than initial estimates.
Similarly, the temporary debt freeze may last quite some time before the vast number of lenders and borrowers can sit down to negotiate an agreement, he said.
"At this stage there is no framework for them to work things out." Lachman said. "With what they get on the table, it's difficult to see how this is going to be resolved."
But however wobbly the initial steps for solving the private sector debt crisis, U.S. analysts agreed that the Indonesian government and the IMF were finally addressing the core problems.
Like most of the troubled Asian countries, Indonesia had very small budget deficits and its efforts to follow the IMF austerity program in November not only failed to restore confidence but drove the country into deeper crisis.
"The new IMF program recognizes the problem is the private sector," said Ismail Dalla, president of Washington Asset Management.
Dallar was hopeful that the temporary debt freeze would reduce the pressure on rupiah, which had fallen to a low of 15,000 to the U.S. dollar earlier this month from 2,775 when Indonesia abolished the system of managing the exchange rate band on August 14.
The rupiah was quoted 10,250/0350 in New York Friday.
"The Indonesian companies (with dollar debt) will not be in fire-fighting mode to find dollars to repay the debt," he said.
Dalla explained that liquidity would improve as the local currency, instead of being sold for dollars, would remain in circulation.
"The financial problem is becoming somewhat more manageable," he said. "But the political risk has not changed."
As the financial crisis threatens political turmoil and civil unrest, President Soeharto, who has been in power since 1965, is seeking a seventh term. He had not yet officially named a running mate as vice presidential candidate.