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Life after the meltdown

Business Times - August 5, 1998

Shoeb Kagda, Surabaya – On the road leading into the town centre from the airport, Surabaya's economic decline is starkly visible. On both sides of the road, rows and rows of small shops are shuttered and closed two months after bloody riots and looting brought the city to its knees.

Everything from car repair shops to sundry provision shops to tailors to accountants' firms are closed. These businesses formed the backbone of the city and the region's economy before the economic crisis. Owned mainly by ethnic Chinese who have either fled the city or have chosen to shut down their businesses, this state of affairs represents the wider economic meltdown of East Java.

A region rich in natural resources, East Java stands alongside West and Central Java as one of the economic powerhouses of the Indonesian economy and its growth was a key element behind the country's impressive average of 7 percent growth over the past two decades. East Java contributed 14.5 per cent to Indonesia's total gross domestic product (GDP) and 15.7 per cent of the country's non-oil and gas GDP in 1996, placing the province third behind West Java and Jakarta in its share of Indonesia's output.

More significantly, the region's economy has undergone significant changes over recent years as agriculture, once a mainstay of the economy, has taken a backseat, falling from 32.5 per cent of the region's total economy in 1983 to 16.6 per cent in 1996. Industrial output, however, surged from as low as 16 per cent to 29.2 per cent over the same period.

But the situation has reversed dramatically in the past 12 months. According to local estimates, business activity has declined by some 50 per cent over the past eight months as many companies have been hit by the dramatic fall in the value of the rupiah and by rising social unrest.

Retail trade has been devastated. Businesses ranging from car dealers, provision shops, upmarket clothing and accessories stores to restaurants have been forced to close because of lack of customers. Surabaya's oldest department store, the Nam Department Store, closed its doors permanently last month.

Five-star hotels such as the Hyatt, Sheraton and Westin are reporting occupancy rates of about 35 to 40 per cent as both tourists and business travellers have stopped coming. However, according to a Sheraton spokesperson, business is starting to pick up again and tourists, especially from Taiwan, are returning.

Mega infrastructure projects such as the US$1 billion (S$1.7 billion) oil refinery in Propolinggo have been shelved, while work on another plant in Situbondo – owned by Hongkong-Indonesia joint venture company PT Asia Pacific Petroleum Refinery, in which former president Suharto's son Bambang Trihatmodjo had a stake – has halted, even though the plant is only 50-per cent completed.

"There has been a dramatic slowing down of the economy over the past one year and nearly every sector is affected," said one foreign banker. "Most of our customers are now very weak and our priority has shifted from lending to focusing on debt collecting."

Just last month, one of the largest shoe factories in the area, employing 1,500 workers, was forced to close. According to a Surabaya lawyer who does a great deal of corporate work, many of her clients are facing a similar predicament. "If the rupiah does not strengthen within three months and if the government cannot protect the businessmen from further attacks, a lot more companies will close," she noted.

Anton Prijatno, rector at the University of Surabaya, said unemployment has already reached 1.5 million, and is rising, as many industrial estates have closed over the past few months in this city of four million inhabitants.

Even companies in export-oriented businesses, such as furniture manufacturing, have been affected. While orders are booming, the scarcity of containers in which to ship products is putting a lid on their production levels as many shipping agencies are unwilling to bear the cost of bringing empty ships and containers into Surabaya as imports have virtually dried up.

One ethnic-Chinese businessman who has seen a rise in orders from Europe and the United States for his bicycles told BT that finding containers was now a major problem for many companies in the province. "I can make up to 1.2 million bicycles a year, but with domestic demand now very low and with the difficulty in shipping our products overseas, we are only operating at about 60 per cent of our capacity," he said.

With the economy contracting at a much faster pace than the nationally-expected 20 per cent this year, this once proud economic powerhouse province is finding it difficult to cope with rising inflation and shrinking incomes.

Food is in such short supply that people in the Bondowoso region are eating even the husk of unprocessed rice. According to Ramlan Surbakti, a professor of political science at Airlangga University in Surabaya, many remote areas such as Pacitan, Trangallek, Jember, Tuban and Bajunoggoro have been severely affected by food shortages. While local churches and branches of the Nahdlatul Ulama in the region have been distributing food, Prof Surbakti noted that not enough people were receiving food.

Even students at the campus located in downtown Surabaya have started to distribute free food to people who can no longer afford to buy rice and other basic necessities. "Javanese villagers have been more affected by the economic crisis and the prolonged drought because of the industrialisation and urbanisation of the island over the past 20 years," he noted. "In Sulawesi, for example, people have not been as severely affected because most of them still plant their own food and because agricultural products are fetching high prices."

As economic conditions worsen, the dual problem of unemployment and rising prices is expected to lead to further social tension, said Prof Surbakti. "East Java has always been the barometer for the political mood in the rest of the country. What happens here will flow to the other parts of Indonesia," he noted.