RI budget forecasts may be revised

RI budget forecasts may be revised

SINGAPORE (Reuters): Signs this week that Indonesia has climbed back aboard the IMF bus had analysts forecasting yesterday that a new letter of intent is in the works, and with it the likelihood of updated government budget forecasts with a fresh rupiah target.

Most analysts believe that the new level for the average rupiah dollar exchange rate, required for budget accounting purposes, is expected to be around 6,000 to the dollar.

"I think this time they will probably put it at around 6,000 or 6,500 and expect the rupiah to appreciate to that level," said Nilesh Jasani, regional strategist at SocGen Crosby Securities in Singapore.

"It's very clear the two sides are arriving at a conclusion. However, what needs to be seen is not the agreement itself, but what happens after the euphoria dies down," he added.

Indonesia announced a revised 1998/99 budget on Jan. 23 which predicted zero economic growth in the fiscal year starting April 1, an inflation rate of 20 percent and an average rupiah rate of 5,000 to the U.S. dollar. All these forecasts were approved by the International Monetary Fund.

President Soeharto had announced a budget on Jan. 6 which was largely discredited after he predicted 4 percent economic growth, 9 percent inflation and an exchange rate of 4,000 rupiah to the dollar.

A team from the IMF has been in Jakarta for the past week to review Indonesia's progress on the Letter of Intent signed with the government on Jan. 15. The team's approval is necessary before the IMF Board can approve any further disbursement from the more than $40 billion bailout package it put together at the end of last year.

"During review periods these economic targets are reset so it's likely they will come up with new figures for Indonesia," said Vincent Low, fixed-income strategist at Merrill Lynch International Bank Ltd.

Low said he expected the Indonesian government would have to re-work its growth forecast, the exchange rate forecast and its budget deficit prediction.

But analysts caution that this time around the government and the IMF are likely to be much more sophisticated in announcing a currency target for the financial year.

"They're not necessarily going to come up with a specific currency target. They may indicate a level for the year end or for the next six months. They may also have a different rate for different subsidies," said one economist at a European bank. But he added he believed the effective rate for budget accounting purposes would be 6,000 to the dollar.

Analysts believed that in the current discussions the IMF has given up some of its opposition to the government subsidizing the import of basic food stuffs.

They also expected that the new currency target will have been set with a view to its impact on debt-servicing costs and export cover as well as the budget.

"They are trying to have a much more seamless approach that incorporates all the different problems in Indonesia," the European bank economist said.

Other economists are more bearish on the prospects for a stronger rupiah in any new set of IMF-approved targets.

"I think 8,500 is realistic, below 8,000 and the market would be skeptical," said Low at Merrill Lynch.

He said he doubted the IMF would approve different exchange rates for different subsidies as this would work against their desire for greater transparency in Indonesia's accounts.

"Anyway it would be unwieldy and cause resource misallocation problems," he said.

Low said it was likely the government would be allowed some direct subsidies and a greater relaxation of fiscal discipline. Jimmy Koh, regional economist at I.D.E.A., also believes the rupiah would struggle to get under 8,000 to the dollar, in the near term at least.

He welcomed Bank Indonesia's recent move to hike interest rates, but said it would not take the rupiah to levels of 5,000/6,000 to the dollar.

"All these things that are happening right now are encouraging...You can see the IMF is actually holding the steering wheel. But I think the dollar's downside will be limited to 8,000 rupiah...because the economic fundamentals have actually become worse since the IMF came in," he said.