Indonesia may have unveiled a third-generation agreement with the International Monetary Fund this month to overcome its financial crisis, but most analysts are negative on the rupiah's medium-term outlook. They said the rupiah would weaken again unless the authorities took concrete steps to reform the shattered economy, warning that despite recent rises, interest rates remained too low to give the rupiah much backbone. Drawn-out talks over the terms for repaying the private sector's massive overseas liabilities and continuing political tensions were also casting shadows over the rupiah's prospects, they said. 'The best-crafted revision of the IMF programme would still leave a badly wounded economy, which is one cut away from being mortally wounded,' SBC Warburg Dillon Read said. 'We continue to remain sceptical about the present willingness of this government to bite the bullet, so expect another round of severe exchange rate weakness.' Spot rupiah yesterday recovered to 7,870 to the US dollar after falling to a low of 8,150 from Wednesday's close of 7,850. Dealers were quoted saying there was concern over the drafting of a new bankruptcy law - central to resolution of the debt crisis. Like other regional currencies, the rupiah is trading a world away from the depths it plumbed earlier this year. At the height of investor fear and loathing of Indonesia in January, it sank to 13,000 to the dollar. Revival came on talk of a currency board, a proposal which has since been buried. Over the past three weeks, it has hovered between the 8,000 and 9,000 levels. Merrill Lynch analyst Alex Wreksoremboko said although he did not expect any government backsliding on reforms in the intermediate term, 'recent policy changes are unlikely to result in immediate strengthening of the rupiah as the market is likely to demand real actions'. The new deal maps out 38 further reform pledges until December, with eight deadlines for action. State firms will be privatised, monopolies abandoned and a raft of other measures taken to reinvent an economy that hovers close to collapse. As steps are taken, IMF support payments - suspended since March - should be resumed. State Street global treasury vice-president Frederick Au said: 'It won't go close to 5,000 again, as [President] Suharto expected. 'At worst it would trade between 9,000 and 10,000.' In the short term, economists are looking at interest-rate policy and the debt talks' progress. BZW Asia currency research head Desmond Supple said: 'They've done enough to get the next tranche [of IMF aid] but we haven't seen interest rates high enough, most [longer-term rates] are below IMF target for the year's inflation - that's negative in real terms.' On Monday, Jakarta raised the rate on the benchmark one-month government bills to a record 50 per cent from 45 per cent. One-week rates went to 48 per cent from 43 per cent. The IMF expects inflation of 45 per cent this year as the crisis hits home. 'It was a 15 percentage points too few,' Mr Supple said of the rises. The framework for an eventual debt-repayment agreement has begun to come together. Modelled on the Mexico plan, it appears the government will guarantee dollar payments to creditors at a fixed rate, receiving rupiah payments from debtors. The scheme seems certain to involve a write-off by lenders of some - possibly 70 per cent - of the outstanding US$80.2 billion loans. 'Any kind of debt restructuring agreement is good news, because it should take some pressure off the rupiah,' Mr Wreksoremboko said. Critical factors that will shape the rupiah's fate will be student protests, coupled with the mounting social problems caused by a shrinking economy. Students around the country are sustaining vocal demonstrations over Mr Suharto's leadership. 'The biggest risk continues to be social risk as the pain of the reform is likely to continue over the next few months,' Merrill Lynch said.