A far-reaching new agreement between Indonesia and the International Monetary Fund (IMF) aimed at biting deep into the "crony capitalism" which is blamed for stalling economic reforms in Indonesia failed unexpectedly to revive stock markets and currencies in south-east Asia yesterday.
Analysts said investors will wait for hard evidence of change and for the outcome of a growing power struggle in Indonesia, where calls for President Suharto to step aside have been increasing.
Hong Kong's volatile market, which had shrugged off Monday's collapse of its biggest investment bank, led the way in a new regional slide, accelerated by rumours that another two big Hong Kong companies were in trouble.
Stocks and currencies also fell in Singapore and Indonesia, taking the steam out of a two-day rally which had raised hopes the crisis was bottoming out.
The current bleak phase of the Asian crisis was sparked by Indonesia's tardiness in enacting reforms agreed with the IMF in October in return for a US $47 billion rescue package, and there is scepticism about the new deal. Observers recall that one debtridden bank controlled by the president's son and closed as a condition of the IMF rescue, was quietly reopened under a different name.
In a letter of intent signed with the IMF yesterday, President Suharto agreed to cut monopolies, some controlled by his three sons and daughters, to refrain from bailing out debt-ridden banks and to drastically revise economic forecasts attached to last week's budget, which were so unrealistic they led to a collapse of the Indonesian currency and stock market.
Economic growth is now predicted to be zero rather than four per cent and inflation 20 per cent rather than 9 per cent.
The rupiah rate, upon which the budget is based, has been set at 5,000 rather than 4,000 to the US dollar. A 1 per cent budget deficit has also been suggested under the new calculations, implying greater latitude by the IMF on efforts by the government to stimulate real economic growth.
Among the promises was an end to a controversial monopoly on cloves, a key ingredient of Indonesian cigarettes, controlled by one of the president's sons.
The letter said 12 infrastructure projects had been cancelled because of the economic crisis, including a $1.77 billion power project being built by a joint venture that includes a unit of Hong Kong's Hopewell Holdings. President Suharto's eldest daughter controls a local company which is part of the joint venture developing the coal-fired plant.
The deal was negotiated for the IMF by managing director Michel Camdessus, who told reporters that cartels in cement, paper and plywood would also be scrapped. All are controlled by the president's close associates.
Missing from the report was one item which many banks and investment companies outside Indonesia badly wanted - a commitment by the Indonesian government to guarantee private sector debt. This could have a knock-on effect in Japan where banks account for 39 per cent, or $23 billion, of all foreign loans to Indonesia in the first half of 1997.
In Beijing, US Deputy Treasury Secretary Lawrence Summers met Chinese economic mastermind Zhu Rongji, who reaffirmed that China had no plans to devalue the yuan, a development which could deepen the crisis in Asia.
In Washington, the US Treasury said it was seeking a meeting of finance ministers to discuss new initiatives to deal with Asia's crisis as opposition to more bail outs grows among US politicians. Democratic whip David Bonier said: "We cannot support a bail out that imposes an economic stranglehold on working people, tramples democratic rights, ignores the causes of instability, and then asks the American taxpayer to foot the bill."
Battered Hong Kong gets used to new game plan: Business This Week 1, pages 4 & 5 Editorial Comment: page 17