RECENT ECONOMIC REPORTS

FINANCIAL HIGHLIGHTS, EARLY MAY 2000

Summary. In response to the decision to delay completion of the IMF's first review of the program signed on January 20, the GOI spent early April in a flurry of activity aimed at making up for lost time on implementation of reforms under its IMF-supported economic program. Mid-month, official bilateral creditors and the GOI agreed at the Paris Club to reschedule certain bilateral debts falling due between April 1, 2000 and March 31, 2002. IMF Deputy Managing Director Stanley Fischer told the press that his April 23-24 visit to Jakarta was intended to assure the GOI of the Fund's continuing support for Indonesia's economic reform and recovery efforts. On April 24, President Abdurrahman Wahid announced that he was replacing Industry and Trade Minister Jusuf Kalla (Golkar party) and State Minister for Investment and State-Owned Enterprises Laksamana Sukardi (PDI-P party). On April 26, Indonesia's ambassador to Singapore, LTG (ret) Luhut Pandjaitan, was installed as the new Industry and Trade Minister and Rozy Munir as the new Investment and State-Owned Enterprises Minister. Laksamana, a former banker who had recently assumed the chairmanship of the Jakarta Initiative Task Force (JITF) on corporate debt, resigned from that position; Bacelius Ruru was named to succeed him at the JITF helm.

The scorecard on financial reform progress was mixed, with little forward movement on corporate restructuring and mixed results in the banking sector. A survey published in leading daily "Kompas" on April 28 indicated that public satisfaction with the Wahid administration's handling of the economy had sunk disturbingly between January and April. Teacher protests over salaries, renewed concern about fiscal sustainability after world oil price declines and postponement of domestic fuel price increased slated for April 1, an S&P downgrading of sovereign risk following the Paris Club announcement, and concern about the cabinet changes were among factors placing downward pressure on the rupiah. In late April and early May, the rupiah hovered at its lowest level -- Rp 8,000/USD 1 -- since mid-October 1999, before Wahid was elected President. Countering exchange rate concerns were better-than-expected projections of first quarter GDP growth, continued low inflation, and encouraging preliminary data on non-oil exports in March. End summary.

INTERNATIONAL FINANCIAL RELATIONS

Early April flurry: After the late-March revelation that the IMF's first review of Indonesia's economic reform program signed on January 20 would be delayed and President Wahid's obviously concerned reaction to the news (Ref. A), the GOI stepped up efforts to issue decrees and take other steps to get the program back on track. Measures reportedly taken addressed, inter alia, strengthening the corporate debt restructuring strategy and improving the transparency and speed of IBRA operations.

Paris Club: On April 12-13, the Paris Club agreed to reschedule certain debts owed by the GOI to official bilateral creditors. Coordinating Minister for Economics, Finance, and Industry Kwik Kian Gie told the press that the total amount covered was USD 5.8 billion (USD 2.21 billion maturing in 2000, USD 2.98 billion maturing in 2001; and USD 717 million maturing in the first quarter of 2002). Indonesia's first Paris Club rescheduling (September 1998) had covered certain obligations falling due between August 1998 and March 2000. The local media noted that the April 13 agreement still depended on the IMF review, slated to begin late-April with Board consideration to be scheduled thereafter.

On April 17, after the Paris Club, S&P downgraded its foreign currency issuer rating to selective default, although Moody's maintained its foreign currency country ceiling at B3, with a positive outlook. The central bank promptly took issue with S&P's announcement. Pointing to the Paris Club requirement that the GOI seek comparable treatment from other creditors, Bank Indonesia stated that it had to try to restructure principal obligations of USD 153.2 million and USD 200 million arising from 1994 and 1995 commercial loan facilities that fell due within the Paris Club consolidation period. With those obligations' due dates of September 2000 and April 2001, Bank Indonesia rejected the "default" label.

IMF returns: IMF Deputy Managing Director Stanley Fischer met with President Wahid, members of the government's economic team, Attorney General Marzuki Darusman, and Parliament Speaker Akbar Tandjung during his April 23-24 visit to Jakarta. Upon arrival, he explained to the media that the purpose of the visit was to assure President Wahid of the IMF's support for Indonesia's economic reform program. Later press reports noted Fischer's remarks that a lot of work remained to be done, particularly in IBRA and the JITF, and that the IMF could not compromise on the issue of good governance. An IMF team subsequently arrived to recommence the first review.

PERSONNEL CHANGES

Mini-cabinet shuffle: On April 24, President Wahid announced that he had sacked Industry and Trade Minister Jusuf Kalla, a south Sulawesi-based businessman and Golkar member, and State Minister for Investment and State-Owned Enterprises Laksamana Sukardi, a former banker and PDI-P member. They were replaced, respectively, by LTG (ret) Luhut Pandjaitan, Indonesia's ambassador to Singapore, and Rozy Munir, political advisor to Wahid before his election who since late 1999 had been secretary of the ministry he now heads. Wahid initially cited the outgoing pair's incompatibility with the rest of the economic team (a reference to Coordinating Economic Minister Kwik Kian Gie and Finance Minister Bambang Sudibyo). Participants in a meeting between parliamentary leaders and the President told the press anonymously that Wahid had given corruption as the grounds for firing the ministers.

Strong reactions: The sackings provoked a publicly strong reaction from several political parties. Golkar and PDI-P said they had considered withdrawing from the cabinet. Star and Crescent Party (PBB) representatives discussed the possibility that their cabinet member, Law and Legislation Minister Yusril Mahendra, might resign; the more immediate reason for him was his disagreement with Wahid's policy on eliminating or reducing legal barriers to the study of communism. Coordinating Minister Kwik told the press he would be willing to resign if the President disapproved of his economic policy management. Observers pointed to expectations of a larger cabinet reshuffle in August, after the People's Consultative Assembly session to which President Wahid will report on the first nine months of his administration.

Waning satisfaction: Leading daily "Kompas" published on April 28 the results of telephone surveys in January (to gauge sentiment after the Wahid government's first hundred days) and April (at the government's six-month mark). Each survey encompassed approximately 1,700 respondents (middle-class and up). On degree of satisfaction with the government's economic and social welfare efforts (prices of staples, restoring the banking system to health, the exchange rate, addressing unemployment, environmental management, and the like), respondents, who were already quite dissatisfied in January, showed greater dissatisfaction in April for most categories. Exchange rate management showed the greatest downward leap (in line with the weakening exchange rate) -- 45.9 percent were satisfied in January, 29 percent in April. When grouped by party and region, most categories showed increased dissatisfaction with the GOI's efforts to improve the economy. For central axis ("Poros Tengah") party adherents, for example, the share of dissatisfied respondents went from 60.9 percent in January to 71.5 percent in April. For Jakarta respondents, the share of dissatisfied survey participants went from 45.8 percent to 62.8 percent over the three-month period.

CORPORATE DEBT RESTRUCTURING

More JITF turnover: The cabinet changes also raised questions about the sustainability of recently emerging JITF momentum. Earlier in April, a new chief operating officer, Samuel Tobing, had been appointed and funding arrangements appeared more secure. When Laksamana left his ministerial office, he also resigned from the chairmanship of the JITF, which he had assumed a few weeks previously. Bacelius Ruru, a career Finance Ministry employee who had shifted to the State-Owned Enterprises Ministry when it was created in 1998, was announced as his successor. During his Finance career, Ruru's responsibilities had included serving as chairman of the Capital Markets Executive Agency (BAPEPAM, Indonesia's equivalent of the SEC) and as Director General for State-Owned Enterprises.

Referrals: In the meantime, corporate debt restructuring remained elusive. The new arrangements whereby the JITF can certify to the interministerial Financial Sector Policy Committee that a debtor is uncooperative remain untested; the determination can be made only after three months of trying to get a debtor to cooperate.

Bankruptcy cases: After having lost the two cases (Tirtamas Comexindo and West Kalindo Pulp Paper Mill) it had brought to the bankruptcy court in late 1999, IBRA tried again in early April. By the end of the month, the Commercial Court had ruled that one case (Ometraco) could not be pursued because the company had already applied for self-liquidation and had turned down another case (Sumi Asih) because the amount of debt was in dispute and on the grounds that IBRA should have filed on behalf of the closed banks whose assets it holds rather than in its own name. IBRA had reportedly settled out of court with the Alatief corporation. The Commercial Court continued to balk at the assignment of the ad hoc judges that IBRA had requested be assigned to its cases; their right to issue dissenting opinions remained an issue, according to press reports.

BANKING SECTOR

By April 2000, the GOI had issued Rp 312 trillion (USD 39 billion) in bonds to recapitalize eligible banks. It was estimated that additional injections of up to Rp 114 trillion (USD 14 billion) would be needed to complete the process. (The total, USD 53 billion, amounted to 38 percent of Indonesia's 1999 GDP.) The following tics summarize septel (Ref. C) on banking sector recapitalization:

-- Private banks eligible for recapitalization: Seven of the nine private banks that in March 1999 had been declared eligible to participate in the program have been recapitalized. The fate of two other large banks, Bali and Niaga, remains unclear. Although some had proposed that Bank Bali, now with a significantly negative capital adequacy ratio, be closed, it appeared by late April that it would receive a reported Rp 4.7 trillion (USD 590 million) in recapitalization bonds. The press reported that former owner Rudy Ramli had agreed to drop his suit (a Jakarta court had decided in March that IBRA's July 1999 take-over had been illegal) in exchange for the recap agreement. Bank Niaga's recap costs had surged to an estimated Rp 9.3 trillion (USD 1.2 billion), but IBRA representatives said it would be recapitalized in 2000.

-- Taken-over banks: Among the banks taken over by IBRA, Bank Central Asia (Indonesia's largest private bank pre-crisis) had been recapitalized and was set for partial privatization in May 2000. On April 27, Bank Indonesia and IBRA issued a joint release stating that BCA had become the first bank to graduate from "bank under recovery" ("BDP-BTO") status; responsibility for its supervision had been returned from IBRA to Bank Indonesia. Bank Danamon (Indonesia's second largest private bank pre-crisis and already merged with PDFCI) was to absorb eight banks that had been taken over instead of closed in March 1999; press sources put the additional capital costs for Danamon at Rp 30 trillion (USD 3.8 billion).

-- State-owned banks: Despite concerns about mergers and recap delays, efforts to recapitalize private banks appeared to be going better than those to recapitalize the state-owned banks, which have already absorbed Rp 208 trillion (USD 26 billion) of the bonds issued so far. Giant Bank Mandiri, product of the merger of four state-owned banks, has been recapitalized. BNI, partially listed on the stock exchange, has been partially recap'd. BRI and BTN recapitalization remains in the future.

Although the bank recapitalization program is well under way, banks have not yet begun to lend again in a robust way. Part of the problem is that the state-owned and private recapitalized banks account for a huge share of banking sector assets, but their capital adequacy remains fragile. Another obstacle is the lack of progress on corporate debt restructuring, which affects the creditworthiness of the many big Indonesian groups that could form the future customer base. Finally, investment climate clouds reduce borrowing demand.

IBRA UPDATE

Banks closed in March 1999: In the old business category, IBRA announced on April 25 that it had completed financial due diligence on 38 banks closed in March 1999 and legal diligence on 35 of them. The banks' shareholders will have to make good on Bank Indonesia liquidity credits ("BLBI") they had received before they were closed and on payments made by the government under the government guarantee on banks' payment obligations. The total bill is Rp 55 trillion (USD 6.9 billion). Nine owners have pledged assets, which are to be valued by an independent party appointed by the shareholders, according to IBRA. IBRA projected wrapping up the 38 cases no later than the end of June.

Monthly IBRA reports: In mid-April, IBRA announced that commencement of a new monthly report, to be made available at www.bppn.go.id. The report indicated that IBRA held the following assets:

Table 1. IBRA Assets as of April 2000

Source: IBRA monthly report, April 2000.

The monthly report did not provide details of IBRA's asset sales plans.

Outsourcing: IBRA issued a call for expressions of interest from third parties to act as servicing agencies for small loans. Eleven agents were expected to be selected.

BANK BALI CASE

On May 1, businessman Joko Tjandra, head of the Mulia conglomerate and alleged mastermind of the Bank Bali scandal (in brief: collusion with GOI officials to engineer IBRA's payment of an interbank claim to Bank Bali) went back on trial. Tjandra is the only suspect in the scandal to be put on trial so far. The first proceedings were stopped short in early March when a judge ruled that Tjandra's case should be civil rather than criminal. A higher court ruled at the end of March that Tjandra's criminal trial should go forward. A different judge is handling the case.

ECONOMIC INDICATORS

Inflation remained low. Consumer prices increased 0.56 percent in April, bringing January-April 2000 inflation to 1.50 percent, according to the Central Bureau of Statistics (www.bps.go.id). Analysts forecast 7-10 percent inflation this year, in part depending on administered price increases for fuel and electricity.

Foreign exchange reserves: Bank Indonesia representatives made conflicting comments about its ability to intervene as the exchange rate sagged. Net foreign exchange reserves stood at US$ 18.2 billion as of May 2, according to Bank Indonesia (www.bi.go.id).

Exchange rate: weakened during April.

Source: CNBC broadcasts.

Exports continued to increase, according to preliminary GOI data. March 2000 exports reached US$ 4.94 billion, increase of 3.7 percent over February 2000, and above monthly export levels pre-crisis (highest 1997 monthly export figure was US$ 4.7 billion). Non-oil exports (a better reflection of the manufacturing sector) reached US$ 3.84 billion in March, a 4.6 percent increase over February. Imports also increased to US$ 2.24 billion in March, up 6.2 percent from February. Capital imports, which fell sharply during the crisis, increased 52 percent in March 2000 compared to February 2000, which the director of the Central Bureau of Statistics interpreted as a sign that investors saw good prospects in Indonesia.

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