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.