Troubled Asia strives for more funding

Troubled Asia strives for more funding

HONG KONG (Reuters): Asia's most crippled economies are
widening budget deficits in a bid to stimulate domestic demand
and head off social unrest -- but funding some of those deficits
could require fresh international loans.

All the countries operating under guidance from the
International Monetary Fund -- Thailand, South Korea and
Indonesia -- are expected to report budget deficits this year,
even though balanced budgets were once a condition of IMF aid.

Analysts said the IMF agreed to South Korea's budget deficit
because its external position has stabilized. Foreign exchange
reserves are rising having already reached end-year IMF targets.

The currency is also gaining support from a large current
account surplus. A big compression in domestic demand sucked the
wind out of imports, allowing the current account to move into
surplus despite little evidence of an export-led recovery.

"Korea can run a budget deficit because the current account
surplus is much larger than originally predicted," said Stephen
Taran, global head of sovereign risk at Salomon Smith Barney.

Unlike Thailand and Indonesia, South Korea is expected to tap
domestic bond markets to pay for its deficit. But neither
Indonesia or Thailand -- which wants IMF approval to run a budget
deficit of $20 billion next year -- operate domestic bond
markets. This means international assistance will be required.

Last month, Jean-Michel Severino, the World Bank's vice
president for East Asia and the Pacific, urged the Group of Seven
industrial nations to help pick up Asia's deficit tab.

"I think the key is that East Asia matters for Japan and Japan
matters for the G7," Severino told Reuters Television.

But some analysts said Asia would have to prove its
willingness to help itself before seeking help elsewhere.

"International assistance will be required but they (Asian
nations) have got to be prepared to pay the price," said Chris
Tinker, regional head of economics at ING Barings in Hong Kong.

The situation is most urgent in Indonesia, where the IMF
recently approved a revised bail-out package that included a 1998
budget deficit of 8.5 percent of gross domestic product.

Rather than signaling an improved external position, analysts
said the deficit confirmed the IMF's new willingness to adapt to
Indonesia's critical situation.

The risk of social unrest is rising in Indonesia, where more
than half the population of 200 million is expected to be unable
to afford basic food by the end of this year.

This deficit promises to become the most troublesome to fund.
Indonesia is prevented under the constitution from seeking
domestic budget financing. Established in the 1960s as a tool to
fight inflation and impose fiscal discipline, this rule could
force Indonesia to appeal for more international aid.

Taran said that out of Indonesia's $54 billion in public
sector debt, cheap and long-term loans from multi-lateral
agencies such as the World Bank, the IMF and the Asian
Development Bank will remain untouched because net cash inflows
exceed service payments. And issued sovereign bonds amount to
little more than $1 billion, requiring minimal service.

More likely would be renegotiation of bilateral aid, or
concessional loans from donor governments, led by Japan.

"It comes down to a Paris Club arrangement, where everyone
sits down and decides how much to reschedule," Taran said.

An ad hoc forum which meets in Paris, the Paris Club allows
Western creditor governments to discuss the renegotiation of debt
owed to official creditors or guaranteed by them.

"But I think there will be ways of arranging things so that
doesn't happen," said Taran. "It's messy. Governments can avoid
that by ponying up (lending) more so the Indonesians can pay them
back. That's more likely."