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."