International rescue plan holds hope for Tigers
INDONESIA's decision to swallow its pride and follow Thailand in accepting International Monetary Fund (IMF) conditions in exchange for a massive financial bail-out should remove some of the drama of southeast Asia's crisis. In an early act of faith, the central banks of Japan, Singapore and Indonesia tested the market by selling $500-million to push the rupiah nearly 10% higher.
This reduced the rupiah's devaluation against the dollar since early July from 33% to 24%. It also enabled a lot of Indonesian private sector borrowers - who owe $56-billion to foreign banks, $36-billion of it short term - to mitigate some of their losses.
The $23-billion package assembled by the IMF, World Bank and Asian Development Bank, plus fall-back facilities of $5-billion each from Singapore and Japan, $3-billion from the US and Malaysia's $1-billion - total $38-billion - should stem the rot on Jakarta's financial markets.
But while the rupiah held most of its gains, the equity market remains in the thrall of international storms. After a 60% collapse in line with its worst-hit neighbours, Jakarta's equity market had been one of the bouncier in recovery. Its dollar value, as measured by the FT/Standard & Poors index, climbed 36% off the bottom, but that gain was trimmed to 13% this week.
In San Francisco, World Bank president James Wolfensohn said he hoped Indonesia's move marked the end of the worst for the ASEAN economies. He was encouraged by Indonesia's acceptance of reforms and hoped Thailand would respond positively to the terms of its $17-billion rescue in August.
That hope was given its biggest step forward when prime minister Chaovakit Yongchaiyut resigned, boosting the Bangkok markets as his successor, Chuan Leekpai - backed by leading bankers and economists - committed his government to change.
The Bangkok government's reluctance to close down 58 bankrupt financial groups into which it had poured $16-billion was a major reason why the August deal which brought in the IMF and eight regional trading partners - including Indonesia - initially failed to restore confidence. The groups were eventually suspended but the dithering prompted outspoken criticism from Lee Kuan Yew, elder statesman of Singapore, which contributed to the aid.
"In nearly every economic crisis the cause is political, not economic," said Lee. "Governments with the political strength to do the unpleasant quickly and thoroughly will reap the best rewards." That was lacking in Bangkok: "Many Thai leaders … have personal interests in the fate of the finance companies and banks; hence there is a natural reluctance to discipline them."
It was the closest any Asian leader has come to using the word "corruption".
Indonesia might have a better chance of taking the necessary "unpleasant" steps because President Suharto's grip seems to be as strong as ever after 29 years in power. One of Indonesia's first actions after announcing economic reforms was to shut down 16 banks - at least 20 more are reported to be bankrupt because of dud loans and covering client forex losses.
The reforms threatened some nepotistic deals. Three banks were owned by members of Suharto's family and his second son filed a suit against Finance Minister Mar'ie Muhammad and the central bank. They backed off this week as IMF managing director Michel Camdessus emerged from a meeting with Suharto this week to say the Indonesian leader was "fully committed" to reforms.
Some $13-billion worth of infrastructure contracts are to be axed. One is likely to be the $1.3-billion planned investment in a "national car" which Tommy Suharto, the president's son, led in partnership with South Korea's Kia Motors - itself the subject of a Seoul government rescue. Tommy's "retirement" from the project opens the way for cancellation without loss of face.
Another item of macho expendiuture likely to go is the development of an Indonesian commuter airliner at the cost of $2-billion in public funds.
Given the Suharto family's web of corporate interests there are doubts whether Indonesia's reforms will be as thorough as needed.
Camdessus - on a "confidence-building" tour of ASEAN capitals - praised the bank closures as "a bold first step", but only the first in a wholesale overhaul. He echoed Lee in stressing: "You must be transparent. You can't hide things."
It was clear after Thailand (and Mexico before it) that the international community would not allow Indonesia to be reduced to collapse.
That was the case even though with $20-billion in reserves and no policy of defending the rupiah in the market Indonesia was in less dire straits than Thailand, which had mortgaged 66% of its $29-billion forex holding in a vain effort to underpin the baht.
The rescue was not just because of the most obvious vested interests in the region such as Japan, 44% of whose exports go to other Asian economies; or Indonesia specifically where the loan exposure of Japanese banks amounts to $39-billion.
US Treasury Secretary Robert Rubin underlined the global ripples when he said: "Financial stability around the world is critical to the national security and economic interests of the US."
After the rescue, however, comes the pain of reforms and pricking the cheap-money property bubbles and other investments based on assumptions of non-stop growth.
UBS Securities in Jakarta reckons Indonesian growth will fall from 7% to 1.5% next year, although the IMF hopes for 3%. While the government predicts a rapid recovery, the example of Japan bodes ill. Since 1991, when its asset bubble fully deflated, Japan suffered four years when growth averaged less than 1% and the 1996 recovery to 3.6% is being followed by a mini-recession.
Meanwhile, the falling off in demand and investment which will pull growth of the five ASEAN economies back below 3% next year, according to Salomon Brothers, and currency devaluation is expected to have a big impact on exports and competition.
Zurich Kemper Investments estimates the combination will drive the US trade deficit in manufactures up by nearly 60% to $300-billion, although the plus side is it will also knock 0.4 percentage points off price inflation.