Indonesia's stockmarket  has recovered even more dramatically than others in Asia. Some of this makes sense; but interest rates and bank bankruptcy are are a bigger burden than foreign funds imagine. IHT May 25


Jakarta: The way that Jakarta stock prices have roared back to 
life in recent weeks might suggest that Indonesia's woes are 
fast becoming a thing of the past. The reality is that due to 
IMF policy prescriptions it is still staggering under some of 
the world's highest real interest rates. Most of its banks and 
many of its corporates have negative net worth and dramatic 
reductions in interest rates are going to be needed to bring 
bad debts under control. 

That is not to say that there are not bargains still to be 
found in a stockmarket which fell farther than any in the 
region. Resource stocks, some utility and lightly geared 
manufacturers still look fundamentally attractive. Others are 
being leveraged back up by the improvment in the rupiah rate. 
But with local funds still very tight, the recent rally has 
been driven largely by foreign portfolio capital. In a thin 
market a modest amount of inflow has had a dramatic impact. In 
dollar terms, Jakarta has risen by more than any market in 
Asia over the past three months. Despite vying with Hongkong 
for the probable title of region's worst performing economy in 
1999, its 12-month stockmarket performance is exceeded only by that of Seoul, the most successful of the crisis countries. 

There are indications that interest rates will be edging down 
gradually. Even the IMF's Asian head Hubert Neiss has given 
his blessing to an easing in the light of falling inflation 
and a stronger currency. But some senior Bank Indonesia 
officials and many others believe that early and much more 
drastic cuts are needed if the financial sector is to be 

Inflation expectations have collapsed. Better harvests, and 
currency stabilisation, if sustained, suggest that inflation 
this year could be under 10%. Yet though interest rates on 
central bank short term paper have been sliding, they are 
still at 28% and lending rates are close to 40% -- or they 
would be if borrowers were paying interest. Most are wholly or 
partially in default. Non-performing loans are at the 70% mark 
and bank losses are mounting at such a rate that announced 
bank recapitalisations are being rendered out of date before 
they get off the ground. 

The proponents of drastic interest rate cuts argue that the 
debt problem cannot be resolved while interest rates are at 
levels few can afford, and even fewer actually pay. They say 
that restructuring of rupiah debts can only happen once 
lending rates are at realistic levels -- say, 18% -- and the 
longer it is delayed the worse the problem becomes. Lack of 
loan repayments is also making new loans impossible and 
delaying economic recovery. Such recovery as has begun has 
been driven by agriculture and commodities. The modern 
corporate sector is still in decline. 

Many Indonesians dispute the argument that a huge interest 
prop is necessary to maintain rupiah stability. They say that 
renewed political unrest is the main threat to the rupiah and 
is little affected by interest rates -- indeed high rates may 
add to instability. Some accuse the IMF of overemphaising the 
exchange rate to benefit foreign creditors at the expense of 
domestic lenders of rupiah. 

Others suggest that the IMF is using interest rate weapon to 
force the government to take a tougher line against defaulting 
crony conglomerates who helped collapse the banking system. A 
firm line with the Suharto era beneficiaries has plenty of 
support among those otherwise critical of the IMF. It provides 
hope to those who expect a strong opposition showing in the 
election to lead to tougher policy on defaulters which would 
be rewarded with lower rates. 

The IMF is softing its view on rates as the inflation picture 
improves and as the entry of Japan's Miyazawa Plan money 
begins to erode the policy influence of the IMF's more 
ideological experts. But there is a long way to go. For now, 
interest rates declines may be small as policy is aiming at 
maintaining rupiah stability in the lead up to the June 7 
election. But the system cannot wait till the choice of next 
president -- probably not till November -- before big rate 
cuts.  Elsewhere in Asia, lower rates and stronger currency 
have been self-reinforcing. Let rates comes down and let the 
rupiah find its own level. It is a risk, but the alternative 
is worse. 




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