Indonesia-IMF conflict and interbank interest rates to set direction

Hong Kong share prices may head lower this week, pressured by the escalating conflict between Indonesia and the International Monetary Fund, which said it would delay an emergency aid payment to the country.

Brokers said turbulence in regional currency and equity markets could push local interbank rates higher, undermining rate-sensitive property and finance shares.

On Friday, the Hang Seng Index rose 1.07 per cent to close the week at 10,919.53 points. Over the five sessions it slipped 4.89 per cent, or 561.16 points, as interbank rates reversed course and firmed as concerns over the region's economies resurfaced.

Worldsec International head of Hong Kong research Bethany Chan Mee-yee said: 'I think [the region is] definitely a key factor affecting interest rates, which affects the market . . . Indonesia and Malaysia look very bad.' Tension between the IMF, which is piloting a US$43 billion bailout plan, and Jakarta rose sharply on Friday after IMF officials said that a second $3 billion tranche of emergency funds would be delayed because the government was backing away from key reforms.

The money had been due for release on March 15 but an IMF statement said that its arrival would be held off at least until next month, raising the spectre of a severe liquidity crunch.

'Sentiment is quite fragile,' Vickers Ballas Securities research director Andrew Fernow said. 'A lot depends on the Hibor [Hong Kong interbank offered rate].' The stand-off comes at a time of heightened political tension in Indonesia, with 76-year-old President Suharto due for re-election on Wednesday.

Nikko Research Centre analyst Steven Thompson said: 'Suharto will obviously win the election and he'll say something accepting his next five-year term. Maybe he'll start talking about IMF-Plus.' Mr Suharto first used the phrase in an address last week, with analysts saying that he might be referring to a plan to peg the rupiah to the US dollar.