Survey of recent developments

There were fears that social conflict on a large scale might break out during the campaign for the eagerly awaited general election on 7 June 1999. This did not eventuate, and financial markets reacted positively The IMF immediately approved a new loan of $450 million, and the World Bank reiterated its commitment to disburse already approved loans totalling $1.1 billion. National accounts data provided signs of recovery, revealing positive growth for the first time since the last quarter of 1997. Inflation has been brought under control. Interest rates have declined significantly, the rupiah has strengthened and become less volatile, and there has been a sharp increase in share prices. On the other hand, export performance has been disappointing, and foreign investment is still on hold. Bank restructuring is now the main focus of economic policy. Bank recapitalisation is under way, with the government contributing most of the capital required in the form of treasury bonds. Its estimate of the outlay needed to make good bank losses and raise capital to an acceptable level is about Rp 406 trillion, though many argue the true cost will be higher. Progress with corporate debt restructuring remains slow. The Indonesian Debt Restructuring Agency (INDRA) and the Jakarta Initiative have yet to record significant results. The government needs to move rapidly to update regulations and tax policies that hamper debt restructuring, to refine bankruptcy law, and to boost the effectiveness of the new commercial courts. The experience of countries that have suffered financial crises shows that credit constraints can retard the recovery process. Financial distress cannot be resolved simply by recapitalising the banks, if other factors continue to impede a resumption of lending.