'RI first to escape from crisis'

JAKARTA (JP): Indonesia is set to escape the regional currency crisis first due to the massive bailout package sponsored by the International Monetary Fund (IMF), according to a Morgan Stanley senior economist.

Timothy J. Condon, vice president of Hong Kong-based Morgan Stanley Asia Ltd., said the IMF program would support the currency and prevent further uncontrolled depreciation of the rupiah.

"What is needed in Indonesia is confidence that the rupiah will not go into a free fall as the short-term debt overhang is unwound. The IMF is precisely what will deliver this confidence," Condon said at a seminar here yesterday hosted by the Econit Advisory Group.

He contended that the sharp depreciation of the rupiah in the past three months was driven by dollar buying pressure from local corporations to repay or roll over their short-term debt, which, according to the Bank for International Settlement, stood at US$34.2 billion as of the end of 1996.

Out of the total short-term private debt, some $20 billion was estimated to be due within the next six months, Condon said.

Nevertheless, the total value of the IMF package, along with bilateral aid commitments, exceeded the amount of short-term debt, he said.

The IMF-sponsored bailout package for Indonesia totals $23 billion, including standby loans from the World Bank and Asian Development Bank.

Several countries have also pledged billions of dollars in standby loans, which could increase the aid package to more than $30 billion.

The bailout package should work well because it was supported by a "good program", which covered monetary and fiscal policy measures, and financial and structural economic reform, Condon said.

"These measures mark the most concerted effort to clean up the financial system to date in Indonesia and the most concerted push to deregulate the real sector of the economy since 1986," Condon said.

The package also marked a strong move away from the export- oriented protectionism-incentive regime toward a more transparent and uniform system of incentives, he said.

"That will serve Indonesia better as it confronts the challenge of moving up the value-added ladder and competing with China and India in light manufacturing," he said.

"The huge devaluation of the rupiah will quickly be felt by importers, who will cut back. Exporters, in contrast, will experience a significant margin improvement," he said.

He predicted that Indonesia's 1997 trade surplus would reach $9.7 billion, up from $6 billion last year.

The current account deficit would narrow to $4.7 billion from $7.8 billion last year, predicted Condon.

"It is the solid evidence of a turnaround in the trade account that is going to dominate market perceptions about Indonesia and enhance confidence in the stability of the rupiah," he said.

Condon forecast that the rupiah would begin to recoup from some of its excessive depreciation and would settle at 3,100 against the dollar by the end of the year.

Yesterday, the rupiah was traded at 3,250 to the dollar in the spot market, up from about 3,600 last week when the IMF package was not yet announced.

Enhanced confidence in the rupiah and external accounts would allow domestic interest rates to ease, Condon said.

"I expect rupiah interest rates to continue to fall and reach their early August 1997 levels by the end of the first quarter of 1998," Condon said.

Falling interest rates and an increasing trade surplus would make it unlikely that banks would suffer a deterioration in credit quality sufficient enough to cause a banking crisis, he said.

"There will be problems in the banking system, but I expect they will remain localized, rather than be systemic, and will be within the ability of the authorities to manage," he said. (rid)

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