Greg Earl, Jakarta – Indonesia is facing the first serious annual contraction in its economy since President Soeharto came to power amid fears that the country can no longer service its foreign debt because of the rupiah's dramatic plunge.

Mr Soeharto attempted to dispel rumours about his health with a sombre appearance on State television late Saturday night in a direct broadcast of a religious ceremony to commemorate the death of his wife last year.

Fears that the country would be forced to seek a debt moratorium caused the rupiah to plunge to more than 5,000 to the $US on Friday as the financial markets were also unnerved by new fears about the health of Mr Soeharto.

In the television broadcast from his home Mr Soeharto declared that he was well, although the setting of the President's first live public appearance in a week is unlikely to quell the speculation about his health throughout Jakarta and foreign financial markets.

"After becoming totally healthy in these 10 days, I still need to return to my previous condition," he said. "Hopefully, everything will proceed well because all this can only be by the grace and blessing of the God Almighty."

His decision not to send the vice-president, Try Soetrisno, as his replacement to the East Asian leaders summit in Kuala Lumpur today is also generating new uncertainty about the country's leadership succession.

Indonesia's foreign debt of about $US110 billion is now larger than its gross domestic product this year which used to be valued at about $US230 billion before the currency crisis.

The servicing cost of the foreign debt has gone from around 5 per cent of total output to 10 per cent, imposing a massive new burden on the economy next year, but that pales beside the estimated foreign exchange loss on unhedged private sector foreign debt which is now more than 20 per cent of GDP.

The entire capitalisation of the Jakarta Stock Exchange is now valued at only about half the total foreign debt and is significantly less than the unhedged foreign debt.

Some private sector economists are now slashing their 1998 growth forecasts to a contraction of at least 2 per cent next year compared with around 3 per cent growth only a month ago when the exchange rate was recovering with the assistance of the International Monetary Fund assistance package.

That could seriously undermine Mr Soeharto's hold on the country because he has anchored his 32 years in power in consistent economic development which has seen average economic growth or around 6 per cent but levels closer to 8 per cent in recent years.

The only time the economy has experienced marginal negative annual real growth in the Soeharto era was in 1982 when falling oil prices and the mounting cost of accumulated debt caused a sudden reduction.

"I think they have now run out of options. Indonesia is in a worse position than Thailand. The debt is worse and the political situation is worse," said SocGen-Crosby regional economist, Neil Saker.

But the Finance Minister, Mar'ie Muhammad, said in New York at the weekend that growth next year would still reach 4 per cent and that the Government was still committed to meeting its IMF reform agreement.

He said he was optimistic Indonesia could overcome the difficulties associated with the reforms and that Mr Soeharto was in good health and focused on fixing the economy.

Many financial analysts were speculating on Friday that Indonesia would need to arrange a debt moratorium because of the risk that the IMF assistance package is not enough to defend the economy although it is unclear how a moratorium would be arranged for private sector debt.

The Latin American debt moratorium and restructuring of the 1980s was essentially dealing with public sector debt but took several years to put into place.

Mr Soeharto dispatched the country's Minister for Foreign Affairs, Ali Alatas, and the Co-ordinating Minister for Production and Distribution, Hartarto, to represent him at the Association of South-East Asian Nations summit, continuing a tradition of rarely allowing the Vice-President to represent Indonesia abroad.

While Mr Try has been handling more domestic duties in the past week during Mr Soeharto's rest, he is thought to have made only one trip abroad as Vice-President, to Australia in 1994.

While Mr Try's political credentials are unclear, many people see his as the best candidate for a smooth transition of power but Mr Soeharto has persistently avoided elevating him to the status of a successor.