Removing the confusion

Removing the confusion

Chief economics minister Boediono was right to jump in and
correct a statement last week by State Minister for Development
Planning Paskah Suzetta, about the government's "plan" to seek
foreign debt rescheduling in 2006.

It was necessary for Boediono to act immediately to remove any
confusion in the market caused by the statement, which if allowed
to stand, could have caused market jitters, raised the country's
sovereign risks, increased the costs of domestic and foreign
borrowing from the financial market and even set off another
speculative attack on the rupiah.

Suzetta, a politician from the Golkar Party, who recently
replaced Sri Mulyani Indrawati in the post, obviously did not
know what he was talking about early last week. Suzetta's
statement should be seen more as an attempt to boost his
political popularity, without fully realizing the consequences of
his words.

Certainly, the interest payments and amortization of foreign
debts in the next fiscal year will increase significantly to
about US$8.8 billion, or almost 21 percent of total spending,
because the government will no longer receive a debt payment
deferment from the Paris Club of sovereign creditors.

However, the Paris Club has standard procedures for
rescheduling debt payments.

The almost $3 billion in debt payment deferments the
government earlier obtained from the Paris Club was a special
case. It was granted not at the government's request, but at the
initiative of several creditors after the devastating earthquake
and tsunami in Aceh and parts of North Sumatra. If the government
requests a new debt rescheduling facility, it would have to
follow the Paris Club's standard procedures.

Boediono and finance minister Sri Mulyani were quite right in
asserting last Thursday that the government had no plan to seek
foreign debt rescheduling. First, the House of Representatives
approved the 2006 budget last October and it has now become law,
and any major changes to the budget would require prior approval
from the House.

Most importantly, the government is no longer entitled to any
debt rescheduling from the Paris Club after it ended its special
arrangement with the International Monetary Fund in January,
2004. The decision to stop the special aid arrangement with the
IMF was based on a political consensus in mid-2003 at the House,
and both the government and the House fully realized the
consequences of the decision.

Nor is the government entitled to debt reduction or
rescheduling programs under the Heavily Indebted Poor Countries
scheme. This is because Indonesia is no longer tied to any IMF
special aid arrangement, and also because the government has yet
to complete a poverty reduction strategy paper, which would also
have to be approved by the IMF and World Bank

We fully agree with Suzetta's view that the burdens of
domestic and foreign debts should be reduced, to allow more
resources to be used for public sector investment in
infrastructure and poverty alleviation.

Official foreign and domestic debts as of this year are still
as much as 52 percent of gross domestic product. Even though this
is much smaller than the almost 100 percent of GDP in 2000, most
analysts consider the debt level still too high, seen from the
risks of a currency crisis and the impact of a high debt ratio on
future tax burdens and lower investor expectations for net
profits. Based on these aspects, a safe level for Indonesia's
public sector debts is about 30 percent to 35 percent, compared
to 60 percent in European Union countries.

It is worth remembering that the World Bank, the Asian
Development and the IMF, to which more than half of Indonesia's
official debts are owed, never grant debt rescheduling. Hence,
debt payment deferments can be obtained only from the Paris Club
of creditors.

The dilemma, though, is that debt rescheduling from the Paris
Club, besides depending mainly on recommendations from the IMF
and World Bank, must follow strict procedures.

Suzetta's misleading statement last week, which seemed to come
out of the blue, should serve as a valuable lesson for the new
economics team on how to handle information to the public and who
should make policy statements.

The day-to-day perception in the market, notably in the
financial market, is formed mainly by what
businesspeople/investors hear and read, not by economic
fundamentals whose indicators are published quarterly.