RI to recover in three years: ADB
RI to recover in three years: ADB
MANILA (Agencies): Indonesia is the most serious casualty of Asia's financial crisis and its economy will not recover until 2001, the Asian Development Bank (ADB) said yesterday.
"Despite its sound macro-economic fundamentals, Indonesia suffered some of the worst consequences of the recent regional financial crisis," the bank said in its annual report. "In terms of the extent of its currency depreciation, Indonesia is the most serious casualty.
Given the magnitude of the crisis, projections indicate that Indonesia will take about three years to recover fully, the report said.
"As the private sector's credit-worthiness fell concomitantly, many foreign creditors stopped renewing debt to Indonesian companies and capital inflows declined, thereby putting further pressure on the exchange rate," it said.
Indonesia's central bank estimated early this month the country's private foreign debt at US$67.7 billion, not including $12.5 billion owed by state-owned companies.
The ADB warned that Indonesia must avoid defaults to prevent its international credibility from being eroded even further.
Negotiations resume in Tokyo next month between government officials and creditors to restructure the Indonesian private sector's foreign debt. Talks earlier this month yielded a "framework" agreement.
The ADB recounted that the seeds of the crisis were sown when Indonesia's economy was booming in 1996 and the first half of 1997.
"The apparent credit-worthiness of Indonesian borrowers, coupled with low interest foreign commercial loans, increased their exposure to unhedged short-term debt."
It said when the currency began to weaken in July 1997, liquidity constraints began to set in which led to a decline in growth in manufacturing and gross domestic product.
At the same time, a withering drought brought about by the El Nino weather phenomenon hampered agricultural performance and forest fires in Kalimantan and Sumatra imposed severe costs on the economy and reduced tourism, the country's third-largest export industry.
For 1998, the ADB predicted a contraction in GDP of three percent and inflation of 20 percent. The figures are more optimistic than government projections, which have forecast GDP falling by five percent and inflation at 45-50 percent in the year.
The ADB said the three main short-term problems facing the economy were the need to stabilize the exchange rate, the reform of the banking sector and resolving the private debt mountain.
"Uncertainty surrounding the resolution of the debt crisis means that investor sentiment will remain volatile," it said.
Besides addressing these, the bank said the Indonesian government must address problems of economic disparity between both income groups and between regions within the country.
It noted that eastern Indonesia was relatively less-developed than the western regions, possibly because of "lack of geographical proximity to central levels of power in a system dominated by excessive bureaucracy".
"The future challenge for policymakers will be to maintain macro-economic balances, while at the same time improving the distribution of income to ensure that disadvantaged segments of society do not bear the brunt of the economic crisis," the bank said.
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