Why Jakarta Needs Peaceful Markets

As rioters and looters raged through the city of Medan, a police officer grabbed a loudspeaker and pleaded: The government will solve the economic problems but there must be peace first.

The officers plea could have been Indonesias plea to investors, who rushed to sell rupiah and stocks again on Wednesday in response to the riots, driving down the exchange rate by 12 per cent to Rp9,050 to the dollar. Indonesias battered economy, too, needs peace first in the currency and money markets before conglomerates can even start to restructure their banks and enterprises.

A key condition for such peace is progress in restructuring at least $67.7 billion in corporate offshore debt.

Indonesian government officials and corporate executives met international bankers and officials in Tokyo yesterday to try to break an impasse in talks. But peace in the markets is less likely than peace on the streets of Medan.

Stability is still far away, says Syahrir, a prominent economist. You have a currency market that is not stable, because you have to factor in the political situation. The money market is in deep trouble. There is no investor confidence in the bank restructuring. Few bankers in Jakarta expect much progress on debt rescheduling until the end of the year. One obstacle is that no side is willing to insure the lenders against a further depreciation of the rupiah during a roll-over period.

The Indonesian government earlier embraced the Ficorca model used in Mexico for a debt rescheduling agency, in which the government insured the exchange rate risk during the roll-over period.

But Radius Prawiro, the governments negotiator, says Indonesia will not insure the exchange rate risk as Mexico had done.

The government has no money, he says.

The government cannot commit anything. Government advisers and diplomats say Indonesia is pushing Japan and Singapore to set up a $20 billion fund that could back the insurance, but may settle for taking on at least some of the risk by insuring a limited range for the rupiah. In return, it hopes for bank commitments to resume trade financing and lending to Indonesian banks.

But Indonesia is facing a divided committee of lenders with Japanese banks said to be taking a harder line who are no longer as much in a rush to reach an agreement as in January.

Bankers and others complain there is little sign that Indonesias corporates are serious about rescheduling and restructuring their companies. Theyre playing golf, says one Indonesian executive.

Theyve given up. How can these companies survive in an environment they are totally unfamiliar with? Rudy Soraya, group director at Putra Surya Perkasa, insists he is still trying to save his company by closing franchises for consumer financing and fast-food, laying off workers and selling real estate assets. But were operating on the assumption this is as bad as it gets, he said. If the economy nosedives, it is an academic question. There will be no business.