Jay Solomon, Jakarta – The U.S. further underlined its commitment to helping Indonesia recover from its financial crisis Wednesday, in the hope of finally putting a stop to the contagion effect rippling out of Southeast Asia.
The U.S. Federal Reserve and the Federal Deposit Insurance Co. will assign experts to aid Indonesian authorities in reforming its financial sector, visiting U.S. Assistant Secretary of Treasury Timothy Geithner announced in Jakarta Wednesday.
That follows the U.S.' pledge last week of $3 billion in 'contingent support' for the International Monetary Fund-led rescue package for the Indonesian economy.
'This is a signal of the importance we attach to a successful effort here in Indonesia and the region as a whole to restore financial stability,' Geithner told reporters.
And Geithner's visit marks the first of a slew of top U.S. government officials expected in Jakarta. Deputy Secretary of State Strobe Talbott and Assistant Secretary of State for East Asia Stanley Roth are set to arrive in Jakarta later Wednesday, while U.S. Secretary of Defense William Cohen is slated to visit Indonesia later the month.
Indonesia's financial markets, however, appeared less than impressed by the higher-level U.S. support for Indonesia. Analysts said there are still many unanswered questions about how Indonesia will implement economic reforms, which are backed with commitments totalling at least $33 billion from the IMF and other international donors.
As well as worries about policy backsliding, analysts said they want a better idea of how Indonesian companies will deal with the huge - and as yet unquantified - amount of foreign currency debt taken out before the rupiah's recent plunge.
The heightened U.S. support for Indonesia comes after criticism from Thailand and other Asian countries that the Clinton Administration was slow to wake up to the financial storm brewing in Southeast Asia. The U.S. contributed nothing to the $17.2 billion IMF bailout package for Thailand - in contrast to the Mexican rescue of 1995 to which the U.S. alone contributed $20 billion. Only the spread of the Asian crisis to U.S. markets last week pushed the Clinton administration to act, some analysts say.
'The U.S. realized they had to act when Wall Street was rattled (by the currency crisis),' said Christa Marti, an economist at the Union Bank of Switzerland in Singapore. 'I think they are making a concerted effort now to make sure that the recent crisis stops here (in Indonesia) now.'
Broader strategic and security issues are at play in Indonesia in a way that they aren't in Thailand or Malaysia, analysts say. Some analysts fear that worsening economic conditions in Indonesia could lead to social unrest, with implications for the whole Asian region.
'In this sense Indonesia is a whole different kettle of fish than Thailand,' says Dewi Fortuna Anwar, a regional affairs expert at the Indonesian Institute of Sciences. 'Concerns over regional stability, over the control of sea lanes, all come into play when looking at Indonesia, and I'm sure this is what's on (U.S.) officials' minds.'
Political relations with the U.S. soured earlier this year, when Jakarta cancelled the purchase of nine F-16 fighter jets from the U.S., and withdrew its participation in a U.S.-led military eduction program. That followed escalating attacks in the U.S. Congress against Indonesia's human rights record.
With Indonesia subsequently buying 12 Russian-made SU-30 Sukhoi jets from Moscow, one Western diplomat says the U.S. has grown concerned about a sense of drift in the relationship with Indonesia. Adds Dewi: 'Washington appears worried that things have not been as warm.'
The visiting U.S. State Department and Defense Department officials are expected to try to rebuild these ties.
But what must be disheartening to U.S., Indonesian, and IMF officials alike is the mixed response global financial markets have shown to the IMF plan since its announcement last week. The Jakarta stock market has actually dipped by nearly 2.5% since last Thursday's close, while the rupiah's nearly 10% gain is mostly due to joint intervention by the central banks of Japan, Singapore, and Indonesia.
Currency dealers in Singapore and Jakarta say that without this intervention, the rupiah wouldn't have gained much on the IMF package alone.
To the IMF and Indonesia's credit, many in the market say, in addition to the huge amount of money pledged, they are impressed by the Finance Ministry's willingness to clean up the finance sector, even at the expense of President Suharto's family. Three banks owned by Suharto family members have been liquidated this week, leading Suharto's middle son, Bambang Trihatmodjo, to commence litigation against the Finance Ministry over the liquidation of his PT Bank Andromeda.
'Their willingness to take on these interests has been impressive,' noted one senior executive at a Jakarta-based brokerage house. Moves to diminish state control over the nation's food distribution network and to cut further import tariffs have also been well-received. The approval for foreign companies to set up wholesaling operations to sell their Indonesia-made products was also a surprisingly liberal move.
But amid these positive signals, analysts say there is worry that the aid and the reforms addressed so far by Indoneisa and the IMF might not be enough to stop the bleeding of Indonesia's private sector.
Bank Indonesia estimates that private sector foreign debt totals around $60 billion, but analysts are concerned that the actual figure is much higher. With much of the debt short-term, and lent Taiwanese and South Korean banks that are now facing problems of their own, there is still concern that a growing number of Indonesian corporations could default in the coming months as they face repayment demands from the foreign banks.
The rupiah could be hit as more Indonesian companies buy dollars to hedge this exposure, undermining the IMF-sponsored reforms.
'Everyone is still unsure whether this package will allow Indonesian (private) debt to be properly sterilized,' says Scott Ashton, director of sales at Deutsche Morgan Grenfell in Jakarta. 'The private-sector problems are the key to Indonesia's fate.'
In addition to the debt problems, more than a few analysts - particularly in Jakarta - also question whether the reforms aimed at cleaning up Indonesia's financial sector and increasing export competitiveness will be effective. They note that the problems in Indonesia's banking system, for example, extend to many more than just 16 banks, and that reductions in food prices controls and tariffs are not much more than what's required under the program set by the Asia Pacific Economic Cooperation (APEC) - to which Indonesia was already committed.
The sense that more needs to be shown in the weeks and months ahead for the IMF package to really be a success.
'You could say that we've seen some initial positive steps, but that they're the first in a drawn-out process,' said William Keeling, chief representative in Jakarta for merchant bank Dresdner Kleinwort Benson. 'We certainly haven't seen a quick fix.'