This article appeared in the IHT on Wednesday, 16 July 2003 and can be obtained at this link.

Graduating from the IMF
Indonesia and Thailand halt new Fund borrowing
By James Tyson (Bloomberg News)
Monday, July 14, 2003

WASHINGTON: An 18-month surge in private investment in emerging markets is prompting Thailand and Indonesia to suspend borrowing from the International Monetary Fund after years of using the Fund as a lifeline to avoid default. But analysts say the move away from IMF aid may undermine investor confidence and inhibit capital flows to such markets.

“It’s a risky strategy, because it could backfire,” said Mark Dow, a former IMF economist who is now an emerging-market fund manager at MFS Investment Management in Boston.

Policy makers in developing countries trying to stabilize their economies rely on the IMF’s approval of their programs to reassure investors and thereby reduce government borrowing costs. The fund reported $90 billion in loans to 55 governments as of July 4.

IMF loans come with detailed conditions that require governments to take such steps as restrict spending, restrain inflation, sell state enterprises and dismantle barriers to trade and investment. Often, these are politically unpalatable, analysts say.

“The IMF is not popular in many of these countries, so leaders find it appealing to take a hard line against the fund,” said Allan Meltzer, an economics professor at Carnegie Mellon University in Pittsburgh.

Thailand this month plans to pay off - two years early - a $5.4 billion loan from the IMF and other lenders, the Bank of Thailand governor, Pridiyathorn Devakula, said last week.

In Indonesia, a government committee was formed in May to draft economic plans for next year based on the assumption the government will halt borrowing from the fund after a $5 billion credit expires in December. Indonesia “seems quite committed to exiting IMF borrowing,” said Tamara Trinh, Indonesia analyst for Deutsche Bank in Frankfurt.

The two countries have depended on IMF credit since the East Asian financial crisis in 1997.

Elsewhere, Turkey, one of the IMF’s biggest clients since the creation of the fund in 1945, wants to halt borrowing when an $18 billion loan from the fund lapses at the end of next year, Economy Minister Ali Babacan said last month.

But plans by these countries to withdraw from IMF support and from the fund’s conditions for aid may discourage more purchases of their debt by banks, mutual funds and other institutions, analysts said.

Such capital flows are “fickle,” said Morris Goldstein, a former IMF official who is now a senior fellow at the Institute for International Economics, a Washington-based research group.

“If bond yields rise substantially in industrial countries and the equity markets there continue to rebound, then crossover investors will say, ‘I’d rather be in those markets’,” Goldstein said.

Private investment in the dollar-denominated, external debt of emerging-market countries rose in the first half of this year to $10 billion, or 37 percent more than the $7.3 billion for all of 2002, said Jonathan Bayliss, head of emerging markets strategy at J.P. Morgan in London. Investors have bought the securities as an alternative to yields on U.S. Treasuries, now near a 45-year low.

“We’re running at triple the in-flows of last year,” Bayliss said. From 1995 through 2001, investors annually pulled cash from dollar-denominated government bonds in emerging markets, he said. Indonesia, Thailand, South Korea and other nations in the late 1990s secured more than $100 billion in emergency aid organized by the IMF to avert default.

“The rally will obviously end,” Morgan Stanley said in “Fed Up,” a June 27 quarterly report on emerging-market debt that followed a sell-off of U.S. Treasuries. Emerging-market debt will lose favor as yields decline compared with those of U.S. Treasuries and other bonds, analysts said. Still, there probably will not be “a major disappointment for the market” during the third quarter, Morgan Stanley said.

In the week ended July 2, investors pulled a net $43 million, or 0.33 percent of assets, from mutual funds holding emerging-market debt, a survey of 164 funds by EmergingPortfolio.com Fund Research in Boston shows.

Indonesia illustrates the hazards of prematurely leaving IMF tutelage. By halting borrowing from the IMF, Indonesia would complicate its chances of winning a ratings upgrade, Moody’s Investors Service said last month. Citing improving debt levels, Moody’s said it was considering an upgrade, the first by the agency for Indonesia since it began rating the Southeast Asian country in 1994.

Indonesia’s external finances could be “more vulnerable” without new IMF credit, Moody’s said. The country is rated six levels below investment grade.

An IMF spokesman, David Hawley, said that indications some borrowing nations would not seek fresh credit “is a normal state of affairs since Fund lending is intended to be temporary and reflects the success of their economic policies.”

The Fund has no shortage of borrowers. It has begun discussions with Argentina over a three-year credit package large enough to help reschedule with private bondholders $95 billion in government debt. In the largest default by a country, Argentina failed in December 2001 to make payment on its bonds.

In June, the Fund approved a nine-month, $120 million loan to Guatemala. Dominican Republic officials say that by mid-July they intend to sign a two-year, $1 billion bailout led by the fund. The Fund said it might approve a $725 million, 15-month loan to Ukraine in August. Still, most countries borrow from the fund only reluctantly and seek to minimize the duration of their loans, analysts said.

  

Posted on July 17th, 2003 by jl
Filed under: ASEAN, Developmental Issues, IMF, Intl Financial System, Regional Financial Concerns: Asia