'RI first to escape from crisis'

'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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