Issues Raised in Parliament

ANSWER TO PARLIAMENTARY QUESTION ON:
Government's Efforts to Assist Indonesia

For Parliament Sitting on 19 Feb 98

Question
To ask the Deputy Prime Minister if he will give an update on the Indonesian economic crisis and whether there are any changes to the Government's approach to help stabilise the situation.

To ask the Prime Minister what are the terms of the proposed guarantee for Indonesian imports and whether the Government is providing guarantees for commercial liabilities.

To ask the Prime Minister, after meeting President Suharto twice in the last two months, what is his latest assessment of the economic situation in Indonesia and what consequent political/social implications he sees for our largest neighbour.

To ask the Prime Minister how he sees the chances of his proposal to assist Indonesia in alleviating the problem of bank credits taking off and how this proposal will complement that initiated by Malaysia for trading in regional currencies.

To ask the Deputy Prime Minister, in the light of fast-changing circumstances in the region pertaining to the currency and economic turmoil, whether the Government plans to give Parliament regular updates on the situation, particularly the Government's response to the situation.

Answer:
1. Members have asked several questions on the Indonesian economic situation, and the Government's efforts to assist Indonesia. I would like to take the answers together.

2. Indonesia's economic prospects remain cloudy. According to official Indonesian estimates, the number of unemployed may rise to more than 8 million in 1998. The drastic fall in the rupiah has pushed up the prices of food and basic necessities, making them unaffordable to many Indonesians. This has triggered riots in towns in Java and other islands. Provision shops have been destroyed.

3. The Indonesian government has taken many steps to stabilise the situation. It committed itself in January to implementing a comprehensive IMF programme. It has organised Indonesian companies to discuss with lenders how to resolve the private sector debt problems, which the companies would otherwise be unable to repay. Unfortunately confidence has not returned, and the exchange rate has not recovered.

4. Indonesia is now considering implementing a currency board system in the hope that it will stabilise the rupiah. The IMF and the World Bank have advised Indonesia that it does not yet have the preconditions to do so. The markets are waiting to see what Indonesia will decide.

5. The IMF, the World Bank, and many countries including the United States, Japan and Australia have been discussing how they can help Indonesia along its difficult path towards economic recovery, and alleviate the hardship and social pain the crisis is causing.

6. Singapore will continue to help Indonesia within the limits of our ability. We are working with Indonesia's friends in the region and worldwide. Our US$5 bn loan arrangement with Indonesia still stands. The loan is structured as a back-up credit, to supplement the IMF programme.

7. We have also helped to work out a guarantee scheme for Indonesian imports. The currency crisis in Indonesia has substantially increased the risks of financing Indonesian trade. Major foreign banks will no longer provide trade financing for Indonesian firms. It has become almost impossible for Indonesian firms to import essential goods, or raw materials and components for their export industries.

8. The proposed guarantee facility is to give confidence to foreign banks to accept Letters of Credit of Indonesian banks. Under the scheme, central banks from a number of countries will jointly counter-guarantee the guarantees made by Bank Indonesia, Indonesia's Central Bank, on letters of credit opened by trade financing banks. The participating countries will cover only sovereign risk, and not commercial risk. It will be a scheme to assure the foreign banks that Bank Indonesia will honour its own guarantees. All corporate risks will continue to be the responsibility of the foreign banks them-selves. The scheme will operate for at most two years.

9. MAS will pledge up to US$2 bn towards the guarantee facility. This amount will come from its existing commitment of US$5 bn for the second tier IMF credit facility for Indonesia. No additional funds need be committed. Our exposure under the counter-guarantee will be proportional to our contribution to the facility.

10. We are still in discussions on the scheme with several countries. It will proceed only if enough countries agree to participate, including the major G-7 countries. The IMF and World Bank have to support the scheme.

11. The multilateral trade guarantee scheme is not related to the Malaysian proposal to use regional currencies to finance regional trade. The former is a short-term measure to overcome the unwillingness of foreign banks to finance trade with Indonesia. The latter attempts to address the longer-term issue of limiting the exposure of trade to currency fluctuations.

12. The events in Indonesia will have a profound impact on the entire region. They have been extensively reported and analysed in the media. Ministers have made many speeches explaining the situation and its significance for Singapore. Members who follow the media reports will have a good overview of developments. When Members raise specific questions, the Govern-ment will provide the House with the information it has.