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.

Currencies -- Page 9

El Nino -- Page 12