Indonesia, Ukraine, and Others May Feel Argentina's and Turkey's Debt Woes

Washington, 16th March 2001 (Bloomberg)

The debt burden that is sending Turkey and Argentina back to the International Monetary Fund for emergency help for the second time in three months is weighing on other countries too, investors and policy-makers warn. Four of the largest developing nations -- Indonesia, Ukraine, Nigeria and Pakistan -- may be facing trouble repaying debt in coming months as an economic slowdown in the U.S., Japan and even Europe makes investors jittery and shrinks exports, they say.

The four nations have been beset by social turmoil, dictatorships and ethnic strife for years, with Indonesia fighting off separatist movements and Ukrainian demonstrators demanding the resignation of President Leonid Kuchma for alleged corruption.

Now, the collapse of multibillion-dollar IMF loan programs for Turkey and Argentina, coupled with signs of a slide in major economies, is sparking concern that Indonesia, Ukraine, Nigeria and Pakistan will be unable to pay a combined $150 billion debt, including $27 billion owed to private creditors. ``We haven't really seen a run from risk like this since before the Asian crisis,'' said Michael Dicks, Lehman Brothers' chief economist for Europe, referring to the capital outflows that rocked Thailand, Indonesia and South Korea in 1997 and 1998.

An index Dicks prepares to measure the performance of emerging market bonds and stocks against U.S. investments ``has been moving quite significantly into risk-averse territory'' in the last week, he said. And J.P. Morgan's index of emerging market debt has fallen more than 1 percent since March 7.

`Vicious Circle'

Without the IMF's backing and with investors heading for U.S. bonds, Indonesia, Ukraine, Nigeria and Pakistan each will have trouble raising private money to pay debts and rebuild their economies, policy-makers say. ``Pakistan is caught in a vicious circle of high debt payments, leading to stagnation in investment and low economic growth,' said Finance Minister Shaukat Aziz.

Its problems come with increasing signs the world economy is slowing. The IMF says world growth will slow to 3.5 percent from 5 percent last year, while U.S. Federal Reserve Chairman Alan Greenspan has said growth in the U.S. is near zero.

And the World Bank has lowered its sights for emerging market economies, blaming it on the more than 60 percent fall in the Nasdaq Composite Index in the U.S. from a year ago. ``We're now predicting a longer period of lower growth,'' , said Hans Timmer, who writes the bank's economic forecasts.

Spelling Trouble

That spells trouble for countries that need to raise the most money from capital markets.

A political spat in Turkey caused investors to pull funds out of liras, forcing the country to abandon its peg to the euro and dollar after exhausting one-sixth of its foreign reserves defending the currency.

Turkey, which got an $11 billion loan from the IMF and other lenders in December, needs up to $25 billion from public and private sources to bail out failing banks, investors say.

Argentina's widely traded FRB bond is at its highest yield over U.S. Treasuries since before the IMF announced a $40 billion loan package in mid-December, pushing the government's borrowing costs higher.

That's having a spillover effect on Indonesia, Ukraine, Nigeria and Pakistan, which many analysts already consider among the world's worst-managed nations.

While a collapse of any one of the four would hardly be a surprise, if all look set to tumble, we may see a repeat of 1997- 98, when East Asia's debt crunch spread to Eastern Europe and then to Latin America, forcing the IMF to assemble almost $200 billion in emergency loans.

Loan on Hold

Indonesia's IMF loan has been on hold since the end of December, as the government and the fund squabble over the central bank's independence and the speed of unloading bad loans.

The rupiah this week fell to its lowest level since October 1998, and analysts have begun to predict Indonesia will default on its foreign debt, estimated at $80 billion. ``We expect that the government's answer to a growing fiscal and balance-of-payments crisis will be a broad-based debt restructuring/default.'' Barclays Capital wrote in its Asia research report this week.

Ukraine owes $1.8 billion to bondholders and foreign banks. After months of negotiating, the country got its loan program with the fund restarted in December. Yet the government's support is evaporating under charges of political murder and high-level corruption.

Opposition lawmakers have vowed to bring down the government in April. Already Ukraine has stopped paying debt to creditor nations -- without getting permission to do so. ``We remain underweight Ukrainian eurobonds'' because political problems outweigh economic data, Chase said in a report.

Pakistan Needs More

Pakistan has also seen a delay in securing IMF support, as it failed to boost tax collection and sell state-owned companies.

Finance Minister Aziz now says Pakistan will get a $138 million loan disbursal from the fund by the end of the month, but warns that it needs more.

Nigeria has a credit line with the IMF it hasn't drawn from as oil revenue boosts foreign reserves. IMF officials say the government can't expect to get a longer-term loan package and go ahead with spending more in this budget.

Without the IMF loan, Nigeria's plea for even some debt reduction can't happen.