Jay Solomon – Indonesia's prospects of a rapid economic recovery have been dashed by the confluence of political uncertainty, financial scandal and the bloodletting in East Timor. Hopes of reversing the trend rest largely on a stable government asserting itself in the wake of the country's most democratic elections in decades.
Through the first half of 1999, signs were emerging that Indonesia was rebounding following the financial crisis that ripped across Asia in 1997. Indonesia's currency, the rupiah, had strengthened to near 6,000 to the dollar, from as weak as 17,000 rupiah per dollar a year earlier. And Indonesia's benchmark interest rate dropped to below 20%, from highs near 70% the previous year. The International Monetary Fund and the World Bank, which are leading a $43 billion bailout package for Indonesia, hailed the nation's financial managers for a prudent monetary policy that allowed Indonesia's inflation rate to stabilize following fears of hyperinflation. And the IMF was projecting Indonesia's economy would see moderate economic growth in the year ending in March, after contracting nearly 14% a year earlier.
Raising optimism, in particular, was June's peaceful parliamentary vote. In the wake of the vote, which many had feared would spawn violence, international investors helped push up the rupiah and Indonesia's stock market on hopes that a transition from former President Suharto's ruling Golkar regime to a democratically elected one would be smooth. And key elements in the nation's economic recovery program, such as debt and bank restructuring, were seen being aided by a calmer political environment.
Guarded optimism
"We've cleared one major obstacle," said Indra Widjaja, a managing director of Indonesia's massive Sinar Mas Group at the time. He and a number of the nation's other ethnic-Chinese tycoons were guardedly optimistic about the return to the rapid economic growth Indonesia had seen for most of the 1990s.
Two major obstacles emerged in the months following the parliamentary vote, however, that have drastically thrown Indonesia's economic recovery off track. The politically charged financial scandal known here as Baligate has run Indonesia's bank-restructuring program aground. And the violence that erupted in the territory of East Timor after a United Nations-sponsored vote on independence has Indonesia running the risk of becoming isolated internationally.
The UN, the US, and the European Union charge that Indonesia's armed forces have "aided and abetted" East Timorese militias that have killed scores of independence supporters in the post-election period.
The IMF and World Bank say they are withholding future loans to Indonesia until the two issues are resolved. Both events "have interrupted, and may even derail, an otherwise steady march toward economic stabilization" in Indonesia, the World Bank wrote in a recent report.
The scandal surrounding PT Bank Bali is seen as particularly damaging to Indonesia's economic hopes, as it is disrupting the desperately needed restructuring of Indonesia's banking sector. Bank Bali is a recently nationalized bank that was found to have diverted 546 billion rupiah ($70.7 million) to a company headed by senior members of President B.J. Habibie's ruling Golkar party. The IMF and foreign investors have been unnerved by the possibility of corruption involving funds overseen by the Indonesian Bank Restructuring Agency, which is leading this bank-restructuring effort.
Senior officials at IBRA already have stated that their efforts to raise nearly 17 trillion rupiah in revenue from the sale of assets is being undermined by the Bank Bali incident.
'Wait-and-see mode'
Indeed, a number of foreign executives who have been trying to buy IBRA-controlled assets in recent months say they are placing their orders on hold as a result of the scandal. Fear that asset quality may have eroded under IBRA's care is one factor, while others say IBRA's management has simply been paralyzed by the scandal. "You can see we're in a wait-and-see mode at the moment," said an executive at a real-estate company who has been looking to buy assets from the agency.
Debt restructuring and overall business also has been impaired by the Bank Bali and East Timor crises. Renewed volatility in the rupiah has halted debt talks in many cases, Jakarta-based bankers say, and businessmen say their business plans have been thrown into confusion. "We don't know at what exchange rate to budget our expenditures anymore," says Richard Hakim, an Indonesian exporter of toiletries to a number of Asian, European and African countries.
He also says that the country's social turmoil has led some of his buyers to suspend orders for fear he won't be able to deliver.
The biggest threat to Indonesia's recovery from the East Timor crisis may simply be that it becomes isolated financially from the rest of the world. The IMF, World Bank, Asian Development Bank and Japanese government have all suspended new loans to the country in the wake of East Timor and the Bank Bali scandals, placing as much as $2.7 billion in financial assistance in jeopardy by the end of the year. Indonesia is heavily dependent on international assistance to finance a budget deficit expected to run at 8.5% of Indonesia's economic output during this fiscal year; economists warn that any prolonged delay in loan disbursements could severely undercut Indonesia's fiscal position.
Tension with Australia
Trade disputes with Indonesia's top trading partners have also emerged as a result of the East Timor crisis. Indonesian wheat buyers, for example, have vowed not to buy Australian wheat, as a result of what they believe is Australia's excessive interference in Indonesia's sovereign affairs: Australia is leading a peacekeeping force to restore order in East Timor. Australian unions, in turn, have refused to unload Indonesian products in Australia as a result, to combat what they charge are human-rights abuses committed by Indonesian troops in East Timor.
This international combination has generated a bunker mentality among many in Indonesia's business community. "If we have to go it alone, we will," says Iman Taufik, a vice chairman of the Indonesian Chamber of Commerce, or Kadin. He says Indonesia may be forced to focus solely on its trade ties with Asian and Middle Eastern countries as a result of the East Timor crisis.
Indonesia's best hopes for economic recovery, businessmen here say, is the formation of a stable government following November's presidential poll. A too-close-to-call race between opposition leader Megawati Sukarnoputri and Mr. Habibie has only been fueling the sense of instability here, unnerving foreign investors and local businessmen alike. And uncertainty over where economic policy making will head in a new government has added another layer of uncertainty.
Still, Indonesia's financial advisers believe that a government with a clear mandate is essential for pushing through the nation's difficult economic program. In a recent letter to Mr. Habibie, the IMF Managing Director Michel Camdessus told the president: "Handing over a stable democracy and a sound economy to the next government would remain a lasting and historic achievement of your presidency and be of the greatest service to the Indonesian people."