Shoeb Kagda, Jakarta – Indonesia will once again look to the international community for massive financial help in 1999 as the country continues to grapple with worsening political and social conditions which threaten to undermine its economic recovery and tear apart its social fabric.

President BJ Habibie will seek an additional US$10 billion in fresh loans next year to finance the government's 1999 fiscal year budget deficit – expected to balloon to about 46 trillion rupiah – and other development expenditure.

"The government will ask the Consultative Group on Indonesia (CGI) and other donor countries for between US$9 billion and US$10 billion in fresh loans in 1999," said Frans Seda, economic adviser to Dr Habibie. "Next year's budget deficit will be larger than this year's because of lower revenue from oil exports and the government's privatisation programme."

The CGI, which groups Indonesia's biggest donor countries, this year loaned the country more than US$14 billion as part of the US$49 billion economic bailout put together by the International Monetary Fund (IMF).

Umar Juoro, a member of the vice-presidential economic and political advisory team, said the main emphasis of next year's budget will be to overcome the impact of the economic and social crisis. "The 1999 budget will still represent an emergency situation as the economy is continuing to contract."

Mr Seda added that next year's budget will assume that the economy contracts by a further 2-3 per cent after contracting by more than 15 per cent this year, and that the rupiah will remain stable at between 7,000 and 8,000 to the US dollar.

Although the budget will continue to pay attention to social safety net programmes, with provisions for food and fuel subsidies, it will need to address the deep structural problems in the financial sector, he noted.

"The government needs to come up with a clear policy for its banking restructuring and privatisation programmes before the next general elections if our economic recovery programme is to progress," said Mr Seda.

"In the privatisation programme, the authorities are too bogged down with political concerns and are not looking at the long-term picture." In fact, Indonesia will enter the second and more difficult phase of its economic recovery next year as the government seeks to put the economy back together. "In some sense, the hard part is just beginning as the second phase will be more difficult and time consuming," said a high-level source.

The first phase, which involved breaking the economic fall and stabilising the situation, has by and large been achieved as inflation has been stopped from rising further and the rupiah has achieved a fragile stability.

According to the source, some confidence has returned to the country as highlighted by rising bank deposits and the fact that foreign reserves have gone up by US$9 billion since June. "The exchange rate has strengthened because the government has been pursuing a disciplined fiscal policy and a tight monetary policy and it's nonsensical to say that it's only because the rupiah is thinly traded," said the source.

However, the volatile political and social conditions could derail the progress made on the economic front if further outbreaks of rioting and killings occur. "The political threat is serious and it is very difficult to predict what will happen as we get closer to the elections," said the high-level source. "In the worst case scenario, not only could the government fail to make further progress but gains to the stability of the economy could rapidly become undone."

If social conditions deteriorate, there are fears the government may be forced to suspend the IMF programme and thus send shock waves through the global community. Mr Seda is worried about the escalation of social violence due to a lack of effective leadership and the government's inability to satisfy public demands for justice.

"Since May, we have had a series of tragic events but there seems to be no clear co-ordinated action on the part of the government to bring those involved to justice. If this situation is allowed to continue, it will jeopardise not only the budget but also the general elections.

"If the social and political uncertainty continues, Indonesia cannot hope to recover from its worst economic crisis in three decades," noted Mr Seda. "Real economic growth is only possible if foreign direct investments resume and the government has a huge debt to repay to its own people in settling the internal problems," said Mr Seda.

This view was echoed by Mr Juoro who said that foreign investors are still keen to participate in Indonesia, especially in the infrastructure and telecoms sectors. But they are sitting on the sidelines in the hope the country does not implode.