RI following the right path: Analysts

RI following the right path: Analysts

LONDON (Reuters): Indonesia's latest steps to restore confidence in its ailing economy are a move in the right direction but its battered currency may be slow to react, London analysts said.

The economic and political uncertainty hanging over Indonesia, in terms of its hugely indebted private sector and President Soeharto's grip on power, still looms large.

But the reform package announced by Soeharto on Thursday was a necessary, if not sufficient, move.

It kept the International Monetary Fund and the United States on board while a way to tackle the crisis of distressed private sector debt and a troubled banking system is formulated.

More immediately, the damage done by the announcement last week of the widely-criticized 1998/99 budget at least has been repaired, analysts said.

Also encouraging were signs that the Soeharto family's business interests are no longer sacrosanct in the process.

Reforms to the local its banking sector are expected to be announced over the coming days and will be awaited by many investors before a final opinion is formed.

"If the measures we've seen today are implemented promptly, then this is very good news for the economy over the medium term," said Sara Zervos, emerging market analysts at BZW in London.

"The initial market fall has to be understood in the context of the exaggerated market expectations before the package and the relentless local demand for dollars to repay outstanding dollar debts," she said. "Unfortunately, the latter is a factor that will be with the market for some time to come."

Dollar/rupiah probed below 7,000 per dollar in the immediate aftermath of the package from about 7,200 bid at the open.

But it retreated sharply from there in London hours later to 8,800/9,300 -- close to where it traded before Wednesday's sharp rally of more than 20 percent.

Jakarta stocks ended down 4.14 percent on the day.

"Market expectations were far too high in the run-up to the announcement. Although the package looks reasonable, we've seen the market quick to take profits as a result," said Graham Neilson, Asia economist at Banque Paribas.

Traders said there had been an element of buying on the rumor and selling on the fact.

Following talks with IMF officials earlier in the week, Soeharto announced revisions to next year's budget.

The assumed dollar/rupiah rate for the financial year was raised to 5,000 from 4,000, the economic growth forecast was lowered to zero from four percent and the inflation estimate was lifted to 20 percent from nine percent.

The revisions were accompanied by reforms elsewhere.

Soeharto said the government would end monopolies in basic commodities except for rice, cut fuel subsidies and end tax benefits for a national car company run by one of his sons.

Soeharto also said the government would not help bail out the heavily indebted corporate sector and the central bank would be allowed more autonomy in conducting monetary policy.

"There may also have been some disappointment in the fact that there was no obvious detail about how the debt situation would be addressed and no mention of reforms to the banking sector," said an analyst at a UK bank.

"But overall this was a much as could be expected for now." IMF Managing Director Michel Camdessus said he was positive Indonesia had taken the right steps and he saw potential in the measures for turning the situation around.

Camdessus said the new rupiah target of 5,000 was reasonable in the next few months.

Yet, investors still need some convincing and the early view from New York contrasted starkly with Camdessus's optimism. New York-based market players said the absence of banking sector reforms, the public sector debt problem and concerns about the succession to Soeharto, in power since the mid-1960s, have to be addressed.