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)