Transcript

May 4, 1998
IMF Meeting Hall A
Washington DC

MR. HOLE: Good afternoon, ladies and gentlemen.

Welcome to this briefing by Mr. Stanley Fischer, First Deputy Managing Director of the IMF on the completion this afternoon by the IMF's Executive Board of the first review under the standby arrangement for Indonesia.

Joining Mr. Fischer at the table is Mr. Hubert Neiss, Director of the Asia and Pacific Department. For good order, the contents of the briefing are embargoed until 15 minutes after the completion of the briefing.

Mr. Fischer, would you wish to say something to begin?

MR. FISCHER: Thanks, Peter.

The Board met today and had a very thorough discussion of the revised Indonesian letter of intent and program. They agreed to disburse $1 billion as the first of three tranches covering the $3 billion that could originally have been disbursed on completion of the first review on March 15 if it had happened then. The next Board review dates for the next $1 billion will be June 4, and the final one will be July 6.

The Board supported the program and said that this revised program is a strong one, but they emphasized the need to implement it and to implement it rigorously. They supported particularly the strengthening of monetary policy, and they also emphasized the importance they attached to those provisions of the program, including subsidies, which are designed to soften the impact of the economic crisis on the poorer people in Indonesia.

This decision to go ahead and disburse the next tranche, the first $1 billion of this tranche, is expected to be followed by the submission--it has already happened, actually--by the World Bank and ADB management of loan proposals to their respective Boards on which the Boards are likely to act within the next couple of weeks. In addition, Japan, Australia, and Malaysia have agreed to disburse to Indonesia--as soon as the technicalities are dealt with--significant amounts of the second line of defense financing that they had been willing to provide. In the case of Japan, it's $1 billion; in the case of Australia, it's $300 million; and in the case of Malaysia, we haven't quite got the details. These will be made available to Indonesia once the negotiations over the precise form have been completed.

In addition, a number of countries have agreed to make financing available for support of exports via export credit agencies, via the financing scheme proposed by Singapore in the coming weeks. So, we can interpret this as being a signal from the international community to provide assistance to Indonesia on the expectation and on the condition that it continues to implement the program that it has agreed.

The Board also, I should mention, commended the staff, led by Mr. Neiss, for the extraordinary work they had done during this arduous negotiation--and it is arduous when you are in Indonesia, and the phone rings all night while you're trying to sleep--which has come to the first stage of its completion. But we are under no illusions that everything will be smooth sailing from now on out. We will follow very closely the implementation of this program.

We have had very full cooperation from the economic cabinet, with which we have been negotiating, with Mr. Ginandjar, the coordinating minister in particular. We have, when problems have arisen, been able to clear them up with him, and we will continue to follow this program very, very closely--on a daily basis, in fact--and in that way, together with the Indonesians seek to keep it on track and seek to get the Indonesian economy back on the road to recovery.

Let me take questions now.

QUESTION: Indonesia today announced that they were going to raise their fuel prices, sparking concerns that this would lead to riots, hurt the poor. What sort of provisions, if any, are you taking to protect those people who might get hurt, given the taking away of the subsidies?

MR. FISCHER: Let me say this about the cuts in subsidies. The way that they are structured is designed to deal with their impact on different strata of society. The highest price increases here, 70 percent, are for gasoline, which is we believe most relevant to high income people. The lowest increase is for kerosene, which is the cooking fuel of the poor, and that has a 25 percent price increase. So that within the structure of these prices increases, there is a very definite and important attempt to cushion the impact on the poorest people. I believe, Mr. Neiss, there's another detail on the types of fuel. Can you fill in that detail?

MR. NEISS: As Mr. Fischer said, most of the increase and most of the budgetary revenue gain comes from gasoline. The next most important type of fuel is called solar oil, which is important for transportation costs. That has an increase of around 60 percent. It is mainly the reduction in the increases for kerosene that is meant to mitigate the social impact. Earlier, when food prices were raised, there was no increase in the price of rice. Food prices on other items, like wheat flour, were raised, but the rice price was kept stable. Again, this was an attempt to mitigate the impact on the poorest sections of the society.

QUESTION: You mentioned a number of important prior actions by the authorities that have been taken. Could you be specific about what was required to ensure the disbursement, and could you tell us a little about what would need to be done to make sure that the second of these disbursements is made?

MR. FISCHER: Hubert, let me turn that over to you.

MR. NEISS: The prior actions are, in fact, included in the letter of intent that is published. There are a number of items. I think the most important item was the action by IBRA, the bank restructuring agency, to take over 14 banks--seven large banks and seven small banks. This was a difficult and courageous action that also demonstrated political independence as well as operational capacity of the new agency. It was handled very well, and unlike the earlier closure of 16 banks, it did not result in any large-scale withdrawals or any loss of confidence. In fact, after effects were very, very mild.

Other important prior actions were substantive increases in interest rates; the increase in food prices, I already mentioned; plus, and also very important, to observe a monetary program. The important monetary aggregates of the Central Bank are, in fact, being kept flat, and that, so far, has been observed.

The requirements for the next tranche will be a review. A review mission will go to Jakarta pretty soon. We will work out new measures. There will be a new letter of intent, which, again, will be submitted to the Executive Board for approval, and if approved, that will trigger the second third of the total amount of $3 billion, which was originally planned for the first quarterly review.

MR. FISCHER: To elaborate on the monetary side, the monetary aggregates, net domestic assets have to stay flat; that is, no expansion in money supply. Net international reserves have to not decrease; no intervention in the foreign exchange markets either. Interest rates should be driven largely by this process but will also, in case the monetary aggregates are inappropriate, have to be adjusted if the exchange rate were to go off track.

There are also assumptions on structural measures. Those are in the letter of intent, which is available on our Web site and on the Indonesian Government Web site.

QUESTION: First, on the reforms, can you tell us what specifically the Indonesians have done to satisfy you, particularly on the issue of cloves, which became controversial last week. And also, on human rights, I know the IMF doesn't normally admonish countries about their human rights policies, but what impact would it have, in your judgment, if there were some sort of brutal crackdown on demonstrations in Indonesia?

MR. FISCHER: On the structural measures, obviously, there were agreements on breaking up a variety of monopolies, including that for cloves. We monitor that, together with our colleagues in the World Bank and the ADB, but particularly the World Bank. We have been following that very closely. One should realize that both in palm oil and cloves, we are dealing with a very large country with a very complicated structure, and it took a while to figure out whether the monopoly was being broken up or being reconstituted. We think, in conjunction with our colleagues in the World Bank, that on the cloves side, the monopoly is in the process of being broken up. There was a statement by the President this morning that contributes to that view, but you can be assured we will, in any case, continue to follow up on reports that we get in Indonesia on what is happening on the ground and keep going back to the government if these things continue.

Of course, if it just looks like the program is being violated rather than problems of implementation, then, we will have to draw whatever conclusions are appropriate. But at this stage, we at least we know we have the cooperation of the economic ministers. Whether others are trying to undermine the program remains to be seen. We are convinced at this stage there is an overall intention to free up the clove industry.

On the palm oil, there is an issue that renders this problem more difficult, which is that palm oil is the basic cooking oil. When we made the agreement in Jakarta earlier last month, the program was designed to prevent a significant rise in the price of palm oil while, at the same time, freeing up the market to allow exports, and that was done by calculating an export tariff. Well, it turned out that when that tariff went into effect, domestic prices seemed to be about to rise, and that was not part of the design of the program. So, we have been working with the World Bank to put in place an alternative mechanism, which is a makeshift approach now, and we will try and get something better in the course of the next few weeks.

On human rights, what impact did that have? Obviously, every government that votes in the Board of the IMF to support a loan like this is making a calculation of which way does more good: to try to mitigate economic hardship and work with a government on these issues; to try to persuade them to improve their record or to withdraw support and let the economic circumstances worsen and hope in that way to achieve improvements.

That is a tough call for anybody, for any person, for any government, and it must depend on how you judge the governments with which you are dealing. There are cases where, clearly, withdrawal of support is the only course you could justify. There are cases where I believe that governments will decide, as they have in this one, that they would rather try to work with the government to change the way it behaves.

But in answer to your question, if that thing went far off track; if, indeed, there were significant, large, visible problems on that front, I think the governments that support this loan and that have voted for it will draw conclusions.

QUESTION: Two questions: one, the second "strike," if you like, was negotiated directly with President Suharto himself. How convinced are you that Suharto stands behind this latest program? And secondly, it was a fairly long Board meeting. Was there any dissent?

MR. FISCHER: On how convinced we are that President Suharto supports it, Mr. Ginandjar and the economic cabinet did keep him fully briefed while we were there and subsequently, and when the disputes have arisen, they have gone to him. The evidence since the mission went to Jakarta in mid-March has been that, possibly as a result of the persuasive efforts of world leaders, including President Clinton, including Chancellor Kohl, Prime Minister Hashimoto and others, that the President decided that this was the better course to take and that he is behind it.

But the real test will be whether the program is implemented and how rigorously it's implemented. That's one of the reasons why we have gone to the three tranches.

As to the length of the Board meeting, by recent standards it was not exceptionally long. I think every Board member, practically every Board member spoke. One or two submitted written statements, but I think every Board member spoke. And then, they ask a lot of questions, and the staff responds. It was not a particularly contentious meeting--actually; less contentious, I think, than we expected. That's in part because the staff has been keeping the Board fully briefed on what's been happening ever since they went back to Jakarta in mid-March, and there were really no big surprises at this stage.

The Board gave very clearly the messages I gave at the beginning; in particular, that they will be watching for adherence to this program, and that there really isn't much room for slippage unless it's a result of external circumstances. So, it was mainly interesting, useful questions about problems that could arise and statements for the record that will be passed on to the Indonesians about the way the Board sees the need to implement this program.

QUESTION: I have two questions for you today. The IMF has said on numerous occasions that it would like to see the rupiah strengthen to about 6,000 to the dollar. It's still trading around 8,000, even with the statements over the last few days by IMF and other officials that the tranche would most likely be forthcoming. How soon do you see the rupiah strengthening to your target? Are we talking this fall or possibly even longer? And the second question that I have is on the ADB and World Bank loans. How much do you anticipate being disbursed in the next 2 weeks?

MR. FISCHER: On how much we see the rupiah strengthening and when, I think calling that sort of thing is a mug's game, and I won't do it. If they stick to the program, it will strengthen at some point. That was hard to get people in the region to believe before we saw what happened with Korea and Thailand, but I think it's now understood that if you stand firm on your monetary policy and get on with implementing the program--and, in this case, if you make progress on the restructuring of the corporate debt--it will begin to strengthen.

In terms of what we have in the program, the exchange rate is expected to average 7,000 in the second quarter--it probably won't make that 6,000 in the third quarter and be below 6,000 in the fourth quarter. But those are working assumptions. We will just have to see whether that will happen.

MR. NEISS: On your second question, the total ADB amount is $1.5 billion, but the ADB will also tranche the loan into two parts. The first part, I think, is about half a billion. The World Bank amount is about the same; again it will be tranched, and they will go to the Board within the next few weeks.

QUESTION: Monetary policy, as you described it, could be considered a currency board arrangement. I assume it is? And also, what happened to the banking sector issues that got in the way of the currency board discussions a few months ago.

MR. FISCHER: I don't think this is a currency board. Now, you ask what's happening on the banks. The difference now is that banks are going into IBRA to be restructured, and IBRA financing is being offset by open market operations. When IBRA borrows to provide liquidity support to a bank, then Bank Indonesia sells in the open market to keep net domestic assets constant.

This is being monitored by a monitoring team that meets with Bank Indonesia officials every day at the end of the day to see what is happening. We hope in the course of the next few weeks that IBRA will move to longer and longer term securities for its financing so that, eventually, instead of providing support and then having Bank Indonesia go out and sell reasonably short-term securities to keep the net domestic assets constant, IBRA will borrow long-term in the market and use the proceeds of that to pay for the banks. But by having IBRA and by seeing very clearly what is being done for the banks, we can begin to separate fixing up the banks from money supply.

QUESTION: Based on how the Indonesians have implemented the program thus far, and taking into account what has been happening with some of the other countries that have been affected by the crisis, what is your sense of the prognosis for the region as a whole as far as their economies are concerned, and when might we see some kind of a turnaround? Is something possible later this year, do you think, or is it still too early to call on that?

MR. FISCHER: If financial stability returns to Indonesia, and by financial stability, I mean an exchange rate which is moving roughly along the paths we were talking about earlier, then, the three countries worst affected by this crisis will have seen a turnaround and the resumption and restoration of some element of financial stability.

We're now in a range with Thailand and Korea where the devaluations are excessive relative to what was probably needed to deal with this crisis; but they're not out of sight, as they were when these currencies were 55 for the baht and 80, 90, 100 for the won. They are back much closer to where they should be. The rupiah could come back as well.

Then, the financial crisis in each one would have turned. But we need to remember--and I think this is your question--the real restructuring has still to be done in Korea and Thailand and probably in Indonesia. The Thais in particular have made real progress in the financial sector, but it has still got to go through to the corporate sector. We are getting encouraging reports of restructuring, financial restructuring, of corporations taking place quietly in a way we hoped it would in Thailand with the banks simply making arrangements with their debtors to write down debt and restructure. That should begin to happen soon in Korea.

If that all goes on schedule, then we could see turnarounds in the real side of the economy late this year or early next year. I suspect in Thailand and Korea, it could be late this year.

Now, you ask whether that is the end of the crisis. Well, there are problems that require us to watch very carefully what's happening. The recurring weakness of the Japanese economy is a factor that has to be borne in mind, including the weakness of the Japanese financial system. The Japanese Government announced that it would take pretty strong action on the fiscal side last week. We hope it will do more on the financial sector side soon.

But that is something that is a worrisome factor in the region, and there is another possibility we need to bear in mind, which is that the econometric evidence is very strong that the prime determinant of capital flows to developing countries is interest rates in the industrial countries. And if interest rates in the industrial countries begin to rise--not a 25 basis point rise or something, but if there is a sustained period of increasing interest rates in the industrial countries, that could make the situation more difficult in the crisis countries and in the developing countries in general.

So, the answer is the old IMF thing: complacency must be avoided. This is way better than it was 2 months ago. If Indonesia stands by its program, there is reason to hope that the three worst-affected countries will be beginning to come out of it, but external disturbances can be imagined.

QUESTION: Can you elaborate on the interest rates? The current climate in financial markets is very speculative about a German interest rate hike. I'm not asking you to predict, but your remark suggests that you think there's going to be a sustained period of interest rate increases.

MR. FISCHER: There is no reason to think now that we are in for a period of sustained interest rate increases, but there is some strengthening, and there are reports on the wires of thought being given in both Europe and the United States to when an interest rate increase might take place. Obviously, it's on the agenda. Obviously, the decisions are difficult ones.

QUESTION: I had a follow up to a couple of the questions you received regarding the cooperation you see or don't see from Indonesia. You mentioned you believe you're getting good cooperation from the economics ministry. The evidence indicates that for now, at least, President Suharto seems to be backing the program. Do you see areas within the Government that are, perhaps, resistant to the program and causing problems for implementation of the program?

MR. FISCHER: Hubert, why don't you take this.

MR. NEISS: I think not within the Government, but from various vested interests, there is natural resistance to the far-reaching structural reforms; in particular, to the dismantling of monopolies and the discontinuation of special tax credits and other privileges. To this, there is naturally opposition, but that is not within the Government. In fact, the coordination minister, Mr. Ginandjar, has set up a monitoring unit that will fully monitor the implementation of all the structural reforms, and he will monitor in cooperation and with assistance of World Bank staff and IMF staff and, if needed, with the help of independent auditors.

MR. FISCHER: I think if you look at where the sources of difficulty have come in the most recent weeks, they are not primarily governmental. They seem to be attempts by the existing monopolies to reconstitute themselves in some way.

QUESTION: You mentioned the corporate debt restructuring. I wonder where we are on that, and how does the IMF feel about the Indonesians taking on some of the foreign exchange risk under that?

And a followup on an earlier question: can we assume from your answer that there was no dissent at this Board meeting, that this was unanimously approved?

MR. FISCHER: On the second, yes, it was unanimously approved. You know, everybody, in their statement, expresses various concerns and reservations, but when the bottom line came, they all supported the program.

On the Indonesian debt restructuring agency, there is a fine balance to be struck. These are private-sector debts to private-sector creditors, and the main concern is to make sure that, in the end, they are dealt with private sector to private sector. But the resolution of this problem also has major economic impacts, and if it isn't solved, it's going to be a drag on the Indonesian economy.

So, we will support some type of governmental framework being provided for the solution of this problem, along the lines, as is well-known, of the Mexican scheme, which was designed to minimize the risks of the scheme to the government and to ensure a restructuring of the foreign exchange payments that would have to be made while, at the same time, ensuring that the government did not take the commercial risk. It will remain true in the scheme that is being worked on by the Indonesians that if an Indonesian debtor can't pay, the creditor doesn't get paid.

What is being provided--or what would be provided for those debts that go through this scheme--is a guarantee that if the Indonesian company pays in rupiah, then the creditor will get paid in dollars. But it is not a scheme in which if the Indonesian company is broke or for whatever reason doesn't pay that the Indonesian Government picks up the debt. It is picking up the foreign exchange risk. It is not taking the commercial risk, and that is a very important principle.

QUESTION: When do you think it will be approved?

MR. FISCHER: There is a meeting of the steering committee with the Indonesian Government in Tokyo starting on the 8th. I guess that's Friday. Mr. Neiss will be there, and we expect to see progress. We're not quite sure how far into the details of the plan they will get, but it's pretty clear that they will agree on the overall framework and quite a few details.

QUESTION: Mr. Fischer, you referred to second line defense financing to Indonesia in your statement. How much money do you expect Japan, Australia and Malaysia will provide to Indonesia in the near future? And do you think that the Indonesian Government cannot carry out their economic reform plan without second defense financing?

MR. FISCHER: Better be very cautious here. Under the second line of defense, Japan will make $1 billion available to Indonesia in the next couple of weeks; Australia, $300 million; and we're not quite clear on the Malaysian contribution. In addition, the Japanese Government will be providing further financing through its export credit agency. But that's not second line of defense money. So, the total amounts that would be made available in one form or another are well in excess of the amounts coming under the second line of defense.

It's clear that the restoration of external financial assistance, including financing for imports through the export credit agencies is going to play an important role in allowing the recovery of the Indonesian economy. And it's also clear that the provision of financing through the second line of defense will provide important reassurance to the Indonesian Government, to Bank Indonesia, which will have access to more reserves if something goes wrong.

So, that is an important part of the overall financing package that is about to be provided, and the export credit financing, including that from the G-7 plus others, including Singapore, which will be a big scheme, is also a very important element.

QUESTION: I understood there were a number of countries that were prepared to provide second-tier financing, but they are not on that list you've got there, including the U.S., which put forward a large promise.

MR. FISCHER: Yes; at this stage, what happened was that countries decided they would make their own decisions as to whether they thought this was the right time to make the second line of defense available. Some of them felt that they didn't want to do it now; that they would rather keep it in reserve.

The precise terms under which the second line of defense is to be made available have not yet been fully negotiated, and countries decided that, rather than attempt to agree on those conditions, they would let each country which had committed to a second line of defense make its own decision. None of the others has withdrawn. They have said to us, well, if things get worse, significantly worse, we will be here, provided, of course, as originally agreed, Indonesia is on track with the program.

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