--- -- UNCLASSIFIED CONFIDENTIAL CONFIDENTIAL RELEASED IN FlmL THE WH TE HOUSE WASHINGTON MEMORANDUM OF TELEPHONE CONVERSATION SUBJECT Telcon with Indonesian President Soeharto PARTICIPANTS The President President Soeharto Interpreter Fred Burks Notetakers Sandra J Kristoff Sean Rice David Higgins and George Chastain DATE TIME February 13 1998 9 54 - 10 32 p m EDT Camp David AND PLACE The President Since we spoke several weeks ago have followed developments in Indonesia closely I wanted to stay in touch and am calling now because I am concerned about the financial situation C Your personal leadership has produced unprecedented economic growth and prosperity for Indonesia and its people I am convinced you can get through this present difficulty C I share your desire to see rapid economic recovery and want to do what I can to work with you I understand one of the proposals under consideration is establishment of a currency board I have studied this proposal and have serious concerns about it that I want to share with you C I have consulted with the IMF and G-7 countries and everyone seems to believe that if you implement a currency board you could put at risk all the progress you have achieved C If markets go after the board it could create a run that seriously depletes Indonesia's reserves and complicates the efforts of th'e IMF and the international community to provide support It could drive up interest rates lead to the collapse of banks and the banking system and make it easier for speculators to move agatnst the rupiah When speculators make a UNITED STATES DEPARTMENT OF STATE CONFIDENTIAL REVIEW AUTHORITY CHARLES E LAHIGUERA Classified by Glyn T Davies DATE CASE ID 30 APR 2008 200502960 Reason 1 5 b d UNCLASSIFIED Declassify on 02 17 08 - --- -- nnllrlnrUTlftl _ -- -- _ - - - - - - - - - - - - - T CONFIDENTIAL run it can drive down a country even as it did Great Britain and this would worsen the situation for you C I know these currency boards seem to have worked in a couple of but everybody I know thinks it will not work for Indonesia It seems a better course would be to focus on strengthening the banking system resolving private sector debt and continuing to implement the IMF reforms C other countries I want to work with' you and witli the IMF in supporting efforts to stabilize the exchange rate We are mobilizing a multilateral effort to help restore trade finance lines to Indonesia working with the IMF and the G-7 We also have a substantial program of food assistance to offer just to help you meet the temporary shortfall you now face C Mr President the task of restoring market confidence also has a political component and that is why it is important to implement the IMF reforms with a leadership team that commands broad ptmlic support and respect And as you and I have discussed many times now it is important to maintain openness and broad public participation in the political system to maintain growth and your impressive record of accomplishments It seems to me that in order to complete the difficult economic adjustments you will need pub ic support Allowing a broad range of viewpoints to be heard-will act to help generate that support C Mr President I believe in your 'leadership record ' and the fundamental strength of your country_ I will do what I can to help That's why I felt moved as a friend to share with yo my concern about this currency board idea C President Soeharto Thank you very much for your interest and I appreciate that you are a close friend of Indonesia and are paying close attention to the situation here C The problem is that after January 15 when I gave the letter of intent to the IMF and even since November when the IMF started to provide assistance the situation has gotten worse C I am trying to implement precisely the letter of intent First the state budget is being revised even though some in Parliament are reluctant to do so Second we are taking appropriate steps on banking reform including merging banks and apPOinting new personnel Eventually there will be only three state banks Third we have established a restructuring program for private CONFIDENTIAL UNCLASSIFIED ''-11'' ' ITIII CONFIDENTIAL banks The task is to see that mergers take place In order to restore confidence in the banking system the government is guaranteeing savings and deposits But we are not going to liquidate any more banks because we believe this would be disadvantageous We will set up new rules about minimum accounts and banks that c nnot meet those rules will be out of business C The problem is that despite all this the decline in the exchange rate continues The rupiah was at 15 000 to one dollar now it is at 10 000 Companies have stopped their work which has caused layoffs and unemployment and unrest C To stop this fall in the exchange rate the'government has intervened repeatedly and we have used $10 billion of our reserves to shore up the rupiah Continuing to intervene will jeopardize our limited reserves which are needed to import goods for industry for example spare parts If we continue to intervene we will exhaust our reserves rC One IMF requirement is expediting trade liberalization I have done that but a consequence has been that many companies cannot distribute basic goods There is a scarcity of foodstuffs and supply and demand has driven up prices which in turn has produced unrest The public has called on the government to remedy the problem But because of the continued decline of the rupiah it is difficult to calculate how much we need to import even of such items as medicine and powdered milk which also now are in short supply Unless we take control and try to stop the fall of the rupiah I fear all companies will stop all business even as we are in the process of reforming the banking system C At the moment we are contemplating introduction of a currency board system But I share your view that there is a great risk in doing this I fear however that unless we take this step all manner of_things will get worse and there will be a great effect on the rest of Southeast Asia C If the currency board is not introduced what is the alternative How do we stop the rupiah's fall I appeal to you to approach the G-7 and ask them to pay attention to the situation in Indonesia I will not insist on a currency board in Indonesia If there is a better alternative I would be happy to apply it C CONFIDENTIAL UNCLASSIFIED f'nl'il nrUT11l1 o ' o I CONFIDENTIAL So this is the situation in Indonesia now help regarding our food shortages C I app eciate your The President I hear your message and I understand your frustration If the rupiah falls you will lose your reserves And if the currency board is caught short and-falls you will lose th e reserves as well just quicker C I want to go back to the G-7 and the IMF and talk to them about al terna ti ves o I want this to work out and am worried the currency board will be an open target I am worried about collapse I will talk to the others and get back to you in a few days e President Soeharto Thank you for your pledge We need to make a decision soon as the people are demanding that their President do something to fix the situation and save the count ry The Indonesian people see the IMF as a savior too late C The President Thank you President Soeharto I will get to work on it Thank you C End of Conversation CONFIDENTIAL UNCLASSIFIED nt''' u- l r-uT' o C This document is from the holdings of The National Security Archive Suite 701 Gelman Library The George Washington University 2130 H Street NW Washington D C 20037 Phone 202 994-7000 Fax 202 994-7005 nsarchiv@gwu edu