Seth Mydans, Jakarta – As an electoral assembly moved through its scripted steps Friday toward the expected re-election of President Suharto next week, the new players on the Indonesian scene – international financial traders – voted no-confidence in the economy.
After a month of relative stability, the Indonesian currency, the rupiah, slumped for its second day because of worries that the International Monetary Fund might suspend or delay part of its $40 billion rescue package.
The fund and its major partner, the United States, have voiced concern over slow implementation of austerity measures that they say are needed to begin the recovery of an economy weakened by inflation, unemployment and hundreds of bankruptcies.
Even at its recent relatively stable rate of around 9,000 rupiah to the dollar, the currency was worth 30 percent less than before the region's fiscal crisis began to hit Indonesia last summer.
On Thursday it dropped further, to 9,800 to the dollar, and Friday it tumbled to 12,000 before partly recovering to end the day at 10,800 to the dollar.
"There is an element of evaporating confidence – whatever little is left – because of IMF displeasure with Indonesia's not necessarily sticking to all the promises," Rajeev Malik, a Singapore-based analyst with Jardine Fleming, said here Friday.
A second infusion of $3 billion is scheduled to be disbursed by the fund on March 15, but Malik said, "There is increasingly a certain perception that it is going to be delayed, though maybe not totally cancelled. That just adds more confusion or uncertainty to an already uncertain picture."
There is virtually no uncertainty about Suharto's confirmation on Wednesday by a 1,000-member People's Consultative Assembly for a new five-year term after 32 years in power.
Since the start of the year, the rupiah has plunged in value, prices and inflation have soared, student at rallies and some public figures have called on the President to step aside and food riots have broken out in provincial towns.
But Suharto, 76, has retained and even consolidated his grip on the levers of power. He has won new statements of allegiance from the military and secured the backing of all three political parties, not only for his own re-election but for the election of his friend, B.J. Habibie, as vice president. At the same time, he has expressed doubts about the shock-therapy prescriptions of the IMF, which he says have done nothing to strengthen the rupiah.
While failing to implement large parts of the recovery package, the president floated the idea of instituting a currency board, which would artificially raise the value of the rupiah at the risk of soaring interest rates, which could bring economic disaster.
The possibility of a sudden increase in the value of the rupiah by decree helped support its value over the past month as traders held on to the currency, financial analysts said. But the president's hesitancy about reform has been a major factor in the continuing weakness.
"He is dodging the tough steps, and it just adds to the uncertainty," Malik said. "At this time, he should be trying to make an all-out effort to eliminate as much uncertainty as possible so that the markets have a clear picture, a game plan, of how Indonesia is going to tackle the problem."
Without this clear picture, analysts said, investors will continue to stay away from Indonesia, unable to make their own plans.
"There's a kind of paralysis, and no one can see a way out of it," Linda Lim, an expert on Southeast Asian economies at the University of Michigan, said. "Nobody is putting money into Indonesia, short term or long term, and the reason has got to be political risk," she said. "Political risk doesn't just mean the risk of political unrest and social unrest and food riots; it can also mean a paralyzed government which cannot implement any of the policies that are required to bring back market confidence." The decline in the rupiah's value has driven up the cost to Indonesia of its foreign debt, which is denominated mostly in dollars, to levels that are all but impossible to pay. Even with the temporary freeze on debt payments announced last month, the burden of more than $65 billion in corporate debt seems insurmountable.
This debt has pushed almost all of the country's major corporations past the level of bankruptcy, although they remain technically alive. Foreign banks have pulled back from their contacts with Indonesian banks, local lending has nearly stopped and business transactions have been put on hold.
"The devaluation is happening so fast that prices have not been able to catch up," an American businessman said. "How can you increase prices by 500 percent? People will start throwing rocks through your window. But if you don't, you lose money on everything you produce. And if you're an exporter and all your lines of credit are cut, how are you going to proceed?"