Jakarta's reforms ease worst fears

Jakarta's reforms ease worst fears

HONG KONG (Dow Jones): Indonesia has put to rest the markets' worst fears by announcing this week that it has complied with the first major set of reforms under the International Monetary Fund's $43 billion restructuring program.

But it will still be a while before there's room for Asian currencies and share prices to move significantly higher, economists said.

Worries about Japan's economy may continue to undermine the yen, dragging all regional currencies lower against the dollar.

And markets will still be watching to make sure Indonesia adheres to its promised reforms

"We certainly haven't gotten to the fine print," said Callum Henderson, managing director for currencies at MMS International.

Last month it seemed possible that Indonesian President Soeharto would turn his back on the IMF, a move that would have had disastrous consequences for all Asian markets.

But the chance of a complete break with the IMF now looks remote, according to Marshall Mays, chief strategist at Nikko Research Center (Hong Kong) Ltd.

"How it's going to work out I'm not really clear, but it will work out,' Mays said, summing up what he said is the current view among foreign exchange traders.

Indonesian Planning Minister Ginandjar Kartasasmita said this week the exchange rate shows that markets believe Jakarta has done everything required to-date by the IMF. The rupiah has strengthened to around 7,900 per dollar late Friday in Asia, from above 10,000 per dollar about a month ago, helping other Southeast Asian currencies rebound.

Ginandjar at mid-week announced government plans to privatize some state companies, to lift an much-watched export ban on palm oil and change bank regulations regarding bad loans.

Meanwhile, Asian currencies have also been helped by signs that the current account positions of many regional countries are improving, a result of the greater export competitiveness that has followed the recent currency depreciations and a cutback in imports.

The current account positions are improving while other indicators remain dismal -- the IMF, the Organization for Economic Cooperation and Development and the Asian Development Bank all recently slashed their growth estimates for regional economies.

The Manila-based ADB forecast this week that 1998 will be Asia's bleakest for almost a quarter century, with inflation, unemployment and corporate defaults all seen rising.

Indonesia will see its GDP collapse 3 percent and the country "will take about three years to recover fully," said the ADB of what it considers the worst affected country.

Even so, analysts say regional currencies have been helped by the gradual return of liquidity to the markets. The collapses that took place in December and January came at a time when there was little two-way trading interest.

"Over the past few weeks, currencies as a whole have shown more stability," said Henderson at MMS International. "Currencies have rebounded on liquidity, although the markets have (also) started to focus on fundamentals."

But analysts also doubt there's much extra upside potential for Asian currencies at this point.

From all-time lows in January, the dollar has already given back a whopping 49 percent against the rupiah, 20 percent on the Malaysian ringgit and 26% on the South Korean won.

Guonan Ma, head of Asia-Pacific economics research at Salomon Smith Barney, said Asian currencies have very little scope to rise so long as the yen remains weak. And that's likely to be the case -- Salomon economists figure the dollar will rise to 140 yen within a few months, from around 129.80 yen presently.