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Vaudine England

ARGENTINA'S POLITICIANS can no longer enjoy a cappuccino in their favourite coffee shops without being booed off the premises by an outraged populace.

Indonesia's financial and political elite continue to swan about happily in Jaguars or Mercedes, lavishing money on mistresses and designer clothes.

And that is not the only difference between the two large countries lurching under massive piles of foreign and domestic debt.

A consensus of economists and analysts in Jakarta believe that Indonesia is in better shape than Argentina and does not face the same threat of default.

The confidence is part of the upbeat mood in Jakarta this week before the April 11-12 Paris Club meetings over Indonesia's debt.

Tellingly, in Indonesia's economy, it is the politics that counts. A Jakarta-based analyst said: 'The key similarity is that both countries' survival is dependent on donor and creditor forbearance.

'If the IMF [International Monetary Fund] and the World Bank said no, we'd default.'

But the veterans' view is that international donors will not pull the plug on Indonesia. This is partly because the Government of President Megawati Sukarnoputri is seen as the best of a bad bunch.

But it is mainly because the United States is believed to be unwilling to let the world's most populous Muslim nation - which also faces serious risks of separatists and warlords, straddles strategic sea lanes and underpins East Asian security - fall into the chasm of social chaos and state collapse.

Out of a list of 11 factors which UBS Warburg listed in a February 6 report that shows how different Indonesia is from Argentina, its last point is that, especially in the wake of September 11, the US need for Muslim allies in its self-declared war on terrorism overrides any reading of the debt repayment schedules.

The report stated: 'The fact that Indonesia is, in addition, the world's most moderate Muslim nation has proven to be an advantage. Indonesia has improved its relationship with both the US and the IMF over the past year. In contrast, US officials reacted critically when the IMF initially proposed disbursing US$6.3 billion in new money to Argentina last summer.'

On the downside, Indonesia does owe more than US$150 billion, which is just below or above 100 per cent of gross domestic product, depending on the numbers used. Private sector tolerance for Indonesia's frequent policy mistakes and perennially delayed reforms is low. More than half of the loans of major international banks are non-performing.

Foreign investment has collapsed in recent years. Domestic capital expenditure lags. Exports have been hit by instability, which has damaged Indonesia's perceived ability to meet deadlines.

Commitments to privatisation and reform of the banking sector are continually derailed by regional power brokers, corrupt implementation and political obstruction.

Foreign debt accounts for about half of Indonesia's total government debt and it is the domestic bit that bothers many. A World Bank report last November said the country's high level of state debt and debt service was not only a product but now a potential cause of economic instability. Poverty reduction and development spending remained restricted by the need to meet high debt service bills.

Indonesia's high level of domestic debt 'tends to reduce the credibility of the Government's resolve to keep inflation low and increases the incentive to 'inflate' away the debt, as has happened in some Latin American countries', the World Bank said.

Indonesia may even ask for a selective default this year, seeking a roll-over of an estimated US$3.5 billion of public sector external debt maturing this year and next.

However, UBS Warburg's report said: 'We think this is not a huge amount compared to the US$5.8 billion that matured in 2000-01. As a result, we do not think that Indonesia's underlying creditworthiness will erode in any substantial way simply because the Government wants a roll-over . . . we foresee little real difficulty on the part of either group [Paris Club and London Club] to agreeing with the Government's likely request for a roll-over of principal.'

This brings us back to the politics involved if creditors refused to deal leniently with Indonesia's less-than-perfect performance.

Analysts also point to the apparent tolerance of Indonesians for economic hardship. When subsidies on domestic fuel were dropped recently, fears of major unrest proved ill-founded. Whether this is because annual per capita income in Indonesia (at US$570) is 13 times smaller than Argentina's remains a subject of debate.

Other reasons are easy to find for a more sanguine view of Indonesia. Unlike Argentina, where the peso was pegged to the US dollar longer than it should have, Indonesia floated its rupiah in 1997 and went through the unrest of regime change and mass demonstrations in 1998.

Indonesia is growing, whereas Argentina has been in recession since 1999. With about US$28 billion in foreign exchange reserves and a slight increase over last year's growth to an estimated 4 per cent this year, it looks much better than Argentina.

Its export sector is a larger proportion of the economy than it is for Argentina. Its relative openness makes its debt more potentially serviceable, analysts say.

Co-ordinating Minister for Economics Dorodjatun Kuntjoro-Jakti naturally insists that the country is 'very different' from Argentina. 'We will honour all our foreign debt payment obligations,' he said.

The generally upbeat report from UBS Warburg agrees, saying: 'Economic contagion should not be an issue for Indonesia.

'Argentina has in recent months suffered a collapse of confidence and an unprecedented economic and monetary crisis. In contrast, Indonesia has seen its political stability bolstered, the consumer spending-led economic recovery continue, and market sentiment turn cautiously optimistic.'

Again, in contrast to Argentina, it states: 'Deposit runs on the banks appear to be a thing of the past [and] deposit levels continue to build in Indonesia.

'Consumers appear to be happily spending money and a survey conducted by state pension fund, Jamsostek, shows that consumer confidence in September last year was higher than in any month since March 2000.'

Alongside the growth is a slightly more favourable debt profile, with 90.5 per cent of the country's external debt on concessional or soft terms.

It lists the floating rupiah, which it believes is undervalued, and the hard currency backing it, and asks: 'What refinancing risk?' Indonesia's refinancing risk has been minimal partly because it has not been to the commercial debt market since 1996, it argues.

'In addition, Indonesia's official debt is locked in for the medium to long term. Multilateral and sovereign leaders have shown little reluctance to roll over principal maturities. Argentina, in contrast, has tapped commercial debt markets in recent years and has been expected by creditors to make principal repayments.'

Argentina's example has also given Indonesian analysts cause to reassess the role of the IMF.

'Let Argentina be a lesson to the IMF,' seems to be the rallying cry, and perhaps a lesson for those in Jakarta who advocate slavish adherence to IMF conditions.

Former finance minister Bambang Sudibyo said: 'The IMF should learn from its experience in Argentina . . . the monetary approach only doesn't work.'

Rizal Ramli, an economist and former cabinet member, has also weighed into the debate.

Mr Rizal wrote in a January article in the Jakarta Post: 'In early October 1997, I wrote that the IMF would not resolve the impending financial crisis, but would instead plunge Indonesia into a deeper economic crisis.

'Many cases in Latin America and Asia have shown that the effectiveness of the IMF's generic prescription for crisis-hit countries is very low.'

Argentina was a prominent example of a repeat IMF patient, and its pattern of economic crisis leading to higher debt levels had been duplicated in Indonesia, he said. 'The time has come for us to learn from the Argentine experience and from our own recent history. Dependence on the IMF can only achieve a temporary and superficial stability. Short-term relief comes at the expense of a growing debt burden, which represents a time bomb lying in wait to set off the next crisis.'

International donors see such attacks as routine jabs at foreign interference. Besides, the risks of an unstable Indonesia outweigh all the double-speak.

'The IMF . . . would plunge Indonesia into a deeper economic crisis'



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