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."