The IMF is sending a team of experts to Indonesia at once to examine developments that led to this week's catastrophic fall in the stock market and rupiah, and consider whether reforms might be speeded up. But in a statement, the IMF said it believed that the fall in the rupiah had been an "overreaction" by the market.
It was also reported that the head of the IMF, Michel Camdessus, would visit South Korea at the weekend to assess the economic situation there.
The announcements came as the IMF approved the release of another $2bn payment to South Korea following a meeting of the fund's board in Washington. Korea, which has appealed more than once for money to be made available as a matter of urgency, was added to the agenda of the board's regular meeting, which also approved a $700,000m payment to Russia.
Meeting in New York, international bankers confirmed their commitment to South Korea and promised to find a solution to its current financial problems. But they failed to offer any specific measures, saying only that more meetings were planned. South Korea has an exceptionally high level of short-term debt, with $40bn falling due before the end of March. Sources in Washington said the conjunction of the meetings in Washington and New York was "coincidence", but indicated that the IMF might not be averse to some "arm-twisting" of the banks in the quest to stabilise the situation in Korea.
Yesterday the Indonesian currency spiralled into free-fall, plunging at one point by 25 per cent before ending the day down 18 per cent. This contributed to a fall which has wiped around one-third off the rupiah's value in just three days. The stock market moved almost in tandem, with share prices dropping by 18 per cent at one point in yesterday's trading before recovering at the close with prices down by 11.5 per cent.
The country is awash with rumours about the situation. The army is on alert to crack down on signs of unrest. Shoppers have besieged stores, using up their money before it loses any more of its value. Meanwhile, the government is showing few signs of having any idea of what to do about the economic meltdown. Following hard on the heels of Tuesday's budget, which was widely viewed as lacking in realism, the central bank yesterday dismissed the currency fall as no more than a temporary phenomenon.
This "Alice in Wonderland" approach, which includes an unwillingness to implement the terms of the International Monetary Fund (IMF) package agreed less than three months ago, could result in a drying up of the funds from the rescue package. The IMF is meeting in Washington, although Korea, rather than Indonesia, is on the agenda.
When the Indonesian markets opened yesterday they were painfully aware of a warning from Lawrence Summers, the US Deputy Treasury Secretary, about the need for Indonesia to show its commitment to reforms agreed with the IMF. The next disbursement of the IMF bail-out, totalling $3bn, is due to be delivered in mid-March. It is now questionable whether the IMF will be prepared to hand over the money.
This concern yesterday led Fitch IBCA, the credit agency, to downgrade Indonesia's long-term foreign currency, saying the tabling of unrealistic budget proposals "which publicly flout recently agreed targets with the IMF is a severe blow to confidence in Indonesia's willingness to maintain appropriate economic policies".
In addition, Fitch IBCA said the deteriorating economic situation raised political stresses within Indonesia, since the Suharto regime has drawn much of its legitimacy from economic success. Other factors included the fact that export earnings would be hit by recent falls in oil prices, while the banking sector could be affected as the plunging currency put pressure on the country's corporate sector.
The ripple effects of the Indonesian crisis have so far had the greatest impact on neighbouring Singapore, which has close economic ties with Indonesia. Yesterday share prices in Singapore fell by 7 per cent, taking the Straits Times industrials index to its lowest point since 1991.
Elsewhere in the region, fears of Indonesian contagion were high, particularly in Hong Kong, which seems poised to raise interest rates at a bankers' meeting today. Fears of a rise sent the Hang Seng Index down by almost 3 per cent in a day of heavy and volatile trading.
As Hong Kong share prices tumbled, the uncertainty over the fate of Peregrine Investment Holdings was prolonged. Hong Kong-based Peregrine, one of Asia's fastest growing finance conglomerates, admitted that Zurich Centre Investment's agreement to take a 24 per cent stake in Peregrine was being renegotiated.
An announcement on the fate of the deal has been delayed until today. This increased speculation about the extent of Peregrine's problems and its ability to secure outside investors to sustain its business.
Elsewhere in the region the news was hardly brighter. In Korea, both the stock market and the local currency showed timid signs of recovery on hopes that the nation's massive debts would be rolled over, providing a badly needed breathing space.
Last night Lee Kyung-Shik, governor of the Bank of Korea, called for a roll-over of the country's short-term debt, with repayment delayed. Speaking after meetings with representatives of the Bank of England and Bank of France, he said South Korea had asked for a "delay, not a conversion" of its debt. Some creditors have been seeking conversion of the debt to bonds.Reuse content