RI crisis may spark new disaster

RI crisis may spark new disaster

By Jonathan Thatcher

MANILA (Reuters): Indonesia's continuing economic problems could lead to a second crisis in the region, Asian Development Bank (ADB) President Mitsuo Sato said yesterday.

But he said in an interview he saw little chance of flexibility being given to Indonesia over structural reforms it is under pressure to adopt.

"I cannot rule out the possibility of a second round of the so-called contagion effect coming this time from a deterioration of the situation in Indonesia," he said in an interview.

"The early addressing of the issues in Indonesia is quite vital, not only to Indonesia but to other countries too," Sato said, adding he was very keenly watching planned talks between International Monetary Fund and Indonesian officials.

IMF officials are currently in Jakarta to review reforms agreed under a bailout program before releasing a second tranche of US$3 billion.

The ADB will not release the $1.5 billion it pledged under the international bail-out until the talks with the IMF are settled, Sato said.

But he added that another $2 billion previously pledged would still go through.

He saw room for flexibility in macroeconomic targets but not in structural reforms, where Indonesia has been baulking, citing constitutional impediments.

"In this kind of situation, the macro-economy is not that important. But when it comes to the question of so-called structural adjustment, which is more important in this kind of crisis...I don't think much flexibility can be justified," Sato said.

"This kind of crisis is very different from the old-fashioned current account crisis in which policy prescriptions are (based) almost solely on macroeconomic targets.

"This time the real nature of the turmoil is very much different...it derives basically from the mismatch between the open capital account and some domestic policy and institutional settings. We have to take a look at the need for them to strengthen the financial system," he added.

By contrast, Thailand and South Korea -- the two other countries worst hit in the Asian currency crisis -- had come to grips with the challenges and were now on the mend, he said.

Indonesian officials were quoted as telling a Japanese parliamentarian that Jakarta wanted to implement all but two of the 50-point program agreed with the IMF in January as part of a deal for financial rescue.

Indonesia needs to stabilize its currency as soon as possible, lower interest rates and stimulate the domestic economy, Sato said.

He joined the many opponents of a proposed currency board, saying it would only worsen the situation.

"It is not a good idea," he said, urging the country instead to make a priority of restructuring its financial system. Any further regional crisis would be limited to more advanced Asian countries.

"You can forget about (contagion in) China, Vietnam, India, Myanmar, Pakistan. These countries have still not opened up their capital account," Sato said.