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Sunday, January 25, 1998 Published at 15:26 GMT



World: Analysis

A good and bad week for East Asia

This week could be a difficult one for the Indonesian economy. Already the currency has fallen to less than a fifth of its level last June. And the financial markets were apparently unconvinced by the revised budget announced at the end of last week. But most economists think the outlook for East Asia's other crisis hit economies is rather better. Business Correspondent Andrew Walker looks at what the next few days may hold for the region:

Indonesia was not the first East Asian country to be hit by the crisis which began last July. But now, it is the country in the region in the deepest financial trouble.

This week will be a testing one. Last week the rupiah plunged again. If the decline continues, Indonesia faces the possibility of hyper-inflation, a condition which makes day to day business almost impossible.

There are two main elements -- the foreign currency debts of Indonesian business, and the lack of confidence in the financial markets in the government's economic policies.

There is a vicious spiral at work. The more worried the markets become about company debt, the less willing they are to hold the Indonesian currency, the rupiah. That pushes the currency down further, making it even harder for business to repay the debts it has in US dollars or Japanese yen.

The Indonesian government has made several misjudgements in handling the crisis. One was its failure to convince the financial markets that it was really determined to confront the distorting commercial privileges of the family of President Suharto.

More recently, the markets were alarmed by a budget that was widely regarded as unrealistic. The replacement budget announced last week was regarded as an improvement, but it still failed to convince.


[ image: The crisis in Indonesia has led to unprecedented demands for President Suharto to stand down]
The crisis in Indonesia has led to unprecedented demands for President Suharto to stand down
The economic assumptions include an exchange rate of 5,000 rupiah to the US dollar -- compared with 4,000 in the first version of the budget.

The most recent market value is in fact more than 13,000 to the dollar. It would take a dramatic change in financial market conditions to achieve the government's assumed level.

The budget also assumes that inflation will be kept to a maximum of 20% this year. That too requires a dramatic strengthening of the currency. With the rupiah its current level, import prices will be so much higher that 20% inflation looks extremely optimistic.

Elsewhere in East Asia, the outlook is less troubled. The financial markets think that the situation in Thailand and South Korea -- the other most severely affected -- is stabilising.

South Korea's negotiations with the banks will continue this week. Korea will probably get what it wants sooner or later; a deal to extend the repayment period for private sector loans. The arguments will be about the terms for the extended loans.
 





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