S. Korean economy may affect Indonesia

S. Korean economy may affect Indonesia

The International Monetary Fund has announced an aid package
of US$55 billion to bail out South Korea's economy. Miranda S.
Goeltom, deputy assistant for monetary affairs to the
coordinating minister for economy and finance, discusses the
possible impact on Indonesia if the package fails to salvage
Korea from its economic crisis.

Question: Do you think the IMF package for South Korea
will be effective?

Miranda: The effectiveness of the package depends on several
factors like whether the Korean government is really committed to
implementing the measures that have been agreed upon with the
IMF. These measures are drawn from predictions on monetary
growth, the outflow of money for debt repayment, the inflation
rate and the growth in exports and imports.

And how this will help the Korean economy, of course, will be
interesting to watch not only by Indonesia but also by the other
countries in the region and the United States. The Korean economy
is the 11th largest in the world and the eighth largest trading
country in the world. It is very aggressive in investing abroad,
both in direct and portfolio investments. Because it is a country
with a gross domestic product (GDP) of more than half a trillion
dollars, the impact of developments there on the economic
stability in the area will be significant.

Q: How bad are economic conditions in South Korea and Japan?

M: The financial condition in South Korea is not as healthy as
it should be. For example, the exposure of short-term debts is
very big and problem loans are huge.

Korean banks have many problem loans. Some predictions mention
that out of $850 billion in domestic loans, about 25 percent are
problem loans. Out of $170 billion in foreign borrowing, more
than half are short-term debts.

The Japanese financial situation is also not very good due to
the weaknesses of regulations set by the Bank of Japan and
credits for property reaching skyrocketing prices. Portfolio
shares take 20 percent of the country's banking portfolio.

Q: How could the developments in South Korea and Japan influence
economic conditions in Indonesia?

M: Korea has invested extensively abroad both in direct and
portfolio investments. The repatriation of these investments will
cause difficulties in Indonesia and other countries where it has
made huge investments.

For the last three weeks, the South Korean won has been
depreciating by more than 40 percent -- even sometimes by 60
percent and 70 percent.

The possible weakening of the Japanese economy might redeem
some of the Japanese money invested in U.S. treasury bonds as
well as increasing the likelihood of a trade dispute between
Japan and the United States because the Japanese trade surplus
will increase in line with the depreciation.

And Indonesia's monetary and financial system, if that
happens, could also be affected because, according to the Nomura
Institute, Japanese financial claims in Indonesia could reach $22
billion.

Q: Will the Chinese economy also be affected?

M: It depends. We've heard that the Chinese government will not
devalue its currency and that it wouldn't create too many
problems for their own banks even though other countries whose
currencies have been depreciating will have competitive exports.

But the scenario would be different if the pressures from the
depreciation of the Korean won, the Japanese yen, the Indonesian
rupiah, the Thai baht, the Malaysian ringgit and the Philippine
peso lead to a Chinese decision to depreciate or devalue the
renmimbi in order to maintain their competitiveness.

The depreciation of the renmimbi would cause jitters in the
domestic market which could start a banking crisis, the impact of
which would be very hard to imagine due to the huge size of the
country.

If South Korea is successful in improving its economy and the
implementation of the IMF's reform package for Indonesia is
effective, Indonesia's economy is likely to recover with strong
growth after a slowdown of at least two years.

Q: How do you think the Indonesian economy will recover?

M: The impact of the currency shock on the aggregate demand in
the economy is usually very much shorter than the interest rate
shock or liquidity shock. Taking this into account after five
months of a volatile currency, I think that the growth in the
property and banking sectors is likely to stagnate. They may grow
by just by 1 percent or 2 percent over the next two years.

But the manufacturing industry is likely to grow a little bit
more than the other sectors -- at between 6 percent and 8 percent
depending on political conditions and investments in the next
year. Meanwhile, the agricultural sector will likely grow by 2
percent to 3 percent. GDP may grow by 4 percent to 4.5 percent in
1998. (riz)