Several major risks affect prospects

Several major risks affect prospects

JAKARTA (JP): The World Bank foresees several major risks that
could adversely affect Indonesia's economic prospects in the
short and medium term, including the economic slowdown in the
U.S., huge foreign and domestic debts, fragile political
environment.

The World Bank said in a report released here on Friday that
the expected slow down in the U.S. economy and consequently the
weakening of global economic and trade would certainly affect
Indonesian export expansion.

"The expected decline in oil prices-- from US$28/barrel in
2000 to under $20 in 2003-- will further reduce Indonesia's
current account surplus," the report on the World Bank Group's
country assistance strategy for Indonesia added.

While the report does not expect a rise in international
interest rates, it warns that Indonesian risk premium-- at
present more than 700 basis point over the U.S. Treasuries--
reflects continued negative sentiments of international investors
towards the country.

Moreover, the World Bank added, the high domestic and foreign
debt, a weak banking and corporate sector, and a growth rate that
is much lower than before the 1997 crisis make Indonesia
particularly vulnerable to such risks.

"The key risks are a more rapid decline in oil prices, a
further depreciation of the rupiah, and an increase in domestic
interest rates," it noted.

According to the report, the largest macroeconomic risk stems
from the government's high domestic debts (more than Rp 650
trillion), which are largely in the form of floating-rate bonds.

"Higher domestic interest rates-- triggered by, for instance,
political turmoil could cause fiscal havoc as a one percentage
point rise in real interest rates would cost the government some
0.3 percent of gross domestic product or the equivalent of $500
million," the World Bank warned.

The report draws three case-scenarios for Indonesia's economic
outlook, ranging from a crisis, base-case to high-case scenarios.

The worst projection-- crisis-scenario--assumes a breakdown in
the government-IMF agreement that could lead to a further erosion
of market confidence and deterioration in economic condition.

"A similar outcome could result from political instability or
a widespread deterioration in law and order as in both cases, the
turmoil would be reflected in a further worsening in financial
markets, especially interest rates and exchange rate," the World
Bank warns.

Another crisis-scenario could result from external shocks such
as a more rapid decline in oil prices, a more rapid slow down of
the global economy and global trade growth or a rise in world
interest rates, which all could trigger renewed macroeconomic
imbalances, according to the report.

The World Bank predicates its base-case scenario on a fragile
political environment and its associated risks to the ongoing
reform program.

According to the report, this base-case scenario is the most
likely situation in Indonesia whereby the economy will muddle
through with a growth of only 4 percent for the next three
years.

This scenario assumes Indonesia remains under the IMF bailout
program but the implementation of its structural reforms will be
very slow with frequent slippages and some policy reversals.
Investor confidence and private investment will revive barely
enough to keep GDP growth at about 4 percent a year.

The World Bank's high-case scenario assumes a greater
political stability and a more aggressive implementation of
structural reforms.

Under this scenario, economic growth is projected at 4 percent
this year, but rising to 5 percent in 2002 and 6 percent in 2003.

Other major assumptions for this scenario include an
acceleration of bank and corporate restructuring, careful
management of the ongoing fiscal decentralization program, and
appropriate monetary and exchange rate policies, as well as key
actions in legal and judicial and civil service reforms.

The report, however, warns that Indonesia's external financing
position remains fragile under any of the three scenarios because
oil prices will decline and export-growth will slow down while
new private equity flows through direct or portfolio investment
will likely remain modest.

"Moreover, Indonesian companies' access to new external
private borrowing is likewise expected to be limited as long as
their debts are not resolved and their balance sheets remain
weak," the World Bank said.

The report notes that in any of the scenarios there is likely
to be considerable political uncertainty, stop-go policies on
reforms and capacity constraints impeding the government's
ability to carry through on its commitments.

"But the probability is high that Indonesia will muddle
through. The challenge for the government and Indonesian
development partners will be managing this uncertainty and
helping reduce the associated risks," the World Bank added. (vin)