RI should suspend debt payments: Sachs
RI should suspend debt payments: Sachs
NEW YORK (Reuters): Indonesia should temporarily suspend
corporate debt payments and rebuild a core of banks to allow some
breathing room to rebuild its battered economy, Harvard
University economist Jeffrey Sachs said Monday.
Sachs criticized Jakarta's recent flirtation with a currency
board, saying that a foreign exchange peg did not make sense. But
he also blamed the International Monetary Fund (IMF) for
triggering a crisis of confidence in Indonesia.
The first step to heal Indonesia's economy would be the
temporary suspension of corporate debt payments, formalizing what
has informally been the case. The cost of Indonesian debt became
exorbitant since the rupiah fell some 70 percent, Sachs said on a
teleconference sponsored by Bank of America.
"Indonesia has absolutely no possibility of servicing most of
the corporate debt over the short term," Sachs said. "It needs a
'time out,' and that time out can work into an orderly workout
arrangement."
Indonesian officials have been negotiating with global lenders
to assemble a restructuring akin to the deal South Korea signed
in January, when Seoul averted financial catastrophe after
international banks agreed to exchange some $24 billion of short-
term Korean bank debt.
"Realistically, one has to expect the nonpayment of Indonesian
corporate debt is going to continue for several months," Sachs
said. "If it were made orderly it would be to everybody's
advantage, both creditor and debtor."
Jakarta must also strive to rebuild "a core of viable banks"
following the sector's collapse late last year, Sachs said.
"There needs to be a new mechanism of getting short-term
working capital -- especially for export projects -- moving
again," Sachs said, recommending that Washington and Tokyo use
their resources to develop a revolving fund for such capital.
Sachs, director of Harvard's Institute for International
Development, has acted as economic advisor to developing
countries across the globe.
The Harvard professor also called for significant support from
Japan and Singapore to stabilize or even appreciate the rupiah,
which traded around 9,150 to the dollar on Tuesday, compared with
2,500 to the dollar in July.
The linchpin to any recovery depended on the credibility of
the Indonesian economic team that will come into office over the
next couple of weeks, Sachs said.
Indonesia has agreed to an economic reform program with the
IMF in exchange for a bailout package of more than $40 billion,
and perceptions that Soeharto may be dithering on the reforms
have led to falling confidence in the economy.
Soeharto's talk of a currency board, which he said he was
carefully contemplating despite heavy criticism from the IMF and
Western nations, has led to further worry.
It was massive confusion over policy that led to proposals
such as the currency board, which were inappropriate for
Indonesia in its current context, Sachs said.
"It doesn't make sense in my opinion," he added.
But Sachs noted that Soeharto took interest in the currency
peg because the IMF programs did not heal Indonesia's ailments.
He said the Fund's policies were too contractionary and neglected
the need for large-scale banking sector recapitalization.
"The IMF prescriptions did not work. President Soeharto
figured that out," Sachs said. "It's not right to say it was
merely Indonesian non-compliance that led to this failure."