RI's budget aside, investors await bank plan

RI's budget aside, investors await bank plan

NEW YORK (Reuters): U.S. investors on Friday shrugged off the Indonesian government's revised budget and waited for it to announce programs to deal with Indonesia's banking sector difficulties.

The revised budget for the 1998/1999 fiscal year, which adheres closely to the deal with the International Monetary Fund, was more realistic than the original version presented on January 6, U.S. analysts said. But they also said its economic growth projections might still be overly optimistic.

But the more serious concern was over measures the government was expected to unveil soon to increase confidence in Indonesian banks.

Finance Minister Mar'ie Muhammad predicted zero economic growth, an inflation rate of 20 percent and the rupiah rate of 5,000 to the U.S. dollar. But the market is expecting the economy to actually shrink four to five percent with inflation 30 to 40 percent and the rupiah in five-digit to the dollar.

The cold reception given to the budget did not bode well for the financial sector restructuring plan, said Feroz Talyarkhan, managing director of Asian fixed income research at Bear Stearns, Inc.

"The market says to the Indonesian government: you have no credibility," he said.

Thanks to central bank interventions, the rupiah ended in Jakarta at 13,000/13,500 after falling to a day low of 15,000. Currency traders said it had become meaningless to predict the level of rupiah.

"With the inflation rate at 20 percent, it would take only a few month for rupiah to reach 20,000 assuming there's no political upheaval," said a trader at a major U.S. bank.

When Indonesia abolished its system of managing the exchange rate through the use of a band on August 14, the rupiah was 2,755 to the dollar.

Market sources said that the lack of confidence in the Indonesian government's ability and willingness to restructure the financial sector was the main reason for the gloom.

Up to now, the government has provided no official blueprint to guide the restructuring of the private sector debt, said Ismail Dalla, president of Washington Asset Management.

Despite diminishing oil revenues, the public sector finance was in no peril, he said. "The government is sitting pretty. The central bank can ride out the storm."

The Indonesian policy makers were perceived as blithely disregarding the interests of foreign lenders, who have some $65 billion in loans to Indonesian companies, Dalla said.

But the foreign investment community was also cognizant that the problem of Indonesian private sector debt was more intractable, U.S. banking sources said.

Unlike Korea's debt restructuring, the Indonesian government was reluctant to provide guarantees and the number of companies involved was estimated at more than 1,000, they said.

To be sure, the exposure of U.S. banks to Indonesia was modest. According to Bank of International Settlements, U.S. bank lending to Indonesia in mid-1997 totaled $4.6 billion, less than one-fifth of the exposure of Japanese banks. Private attempts to reschedule some Indonesian corporate debt last week were unfruitful, said an analyst with a U.S. bank. "The Japanese, or any other lenders, are not taking the initiative."

Japanese Finance Minister on Friday said Japan will cooperate with the IMF and the United States toward seeking stability of the rupiah.

"Banking problems in any country are messy," he said.

"In Indonesia they are as complex as the country itself."