Andrew Marshall, Jakarta – Indonesia's decision to allow an independent auditor to probe a damaging banking scandal has backfired spectacularly – instead of placating foreign donors and investors it has highlighted the myriad risks they face.
The full report by PricewaterhouseCoopers has been deemed by the authorities as too sensitive to publish, despite demands for transparency from the International Monetary Fund and World Bank.
But a 36-page summary, a copy of which was obtained by Reuters, contains enough damning information to keep foreign investors very wary of Indonesia, while falling well short of the comprehensive and transparent probe donors demanded.
"This won't please anyone," said the head of sales at a Jakarta brokerage. "They haven't been allowed enough scope to please the IMF. But for Indonesia the audit is very damaging."
The scandal centres on the payment of 546 billion rupiah ($68 million) by Bank Bali to a firm run by a leading figure in President B.J. Habibie's ruling Golkar party to help recover loans from the Indonesian Bank Restructuring Agency (IBRA).
Indonesia's opposition says some of the commission paid by Bank Bali to recover its money went into Habibie's re-election campaign coffers. Habibie has denied wrongdoing. But there is clear evidence of high-level involvement.
Audit won't placate Indonesia's donors
The World Bank and IMF have said loans to Indonesia are on hold until it resolves the Bank Bali scandal.
The government agreed to the independent audit after intense pressure from donors. But the IMF and World Bank have not been given copies of the full PwC report, and the auditor's summary makes clear it was denied sufficient access for its probe.
"PwC has not been afforded adequate time and sufficient access to information, and has been delayed from conducting an investigation which meets international standards and which ensures complete transparency and accountability," it said.
Analysts said the evasions and obstruction encountered by PwC bode ill for Indonesia's ability and commitment to investigate the scandal to the satisfaction of multilateral donors.
New government no panacea
The loan suspension by the IMF and World Bank is a signal they are not prepared to work with the current government and are waiting for the next one, analysts said. Habibie is widely expected to be ousted at November's presidential election.
While the battered economy can survive a suspension of a few months, a longer-term halt would have a drastic impact both on the economy and Indonesia's fragile transition to democracy.
Most analysts say there is too much at stake for multilateral institutions to risk throwing Indonesia and the region into fresh instability. But they may well be faced with a dilemma. The audit details irregularities at the central bank and IBRA. The central bank says the audit's findings are unfair and its conclusions "very speculative." The bank also complained it was not given the chance to respond to the findings before the report was published. But analysts say some individuals, if not the institutions, need to be purged.
Even if Indonesia changes government, there is no guarantee its economic institutions will be cleaned up. Unless Bank Indonesia and IBRA are reformed, donors may face the dilemma of risking sovereign default and economic collapse by continuing to withhold loans, or losing credibility by resuming lending to a country with institutions still considered suspect.
"I would say there's a need for a wholesale clearout not just of the government but also of some people in these instititions," the brokerage head of sales said. "If not, what's going to change?"
IBRA'S integrity under threat
IBRA's integrity is crucial for Indonesia. The agency runs the bank recapitalisation process, a cornerstone of recovery.
But its power and importance extend far beyond this. It has taken over around $30 billion in bad loans from troubled banks and has seized $10 billion of equity from bank owners. As it pursues debt workout deals, its equity portfolio will expand.
IBRA's influence and special powers make it a central player in resolving Indonesia's multi-billion-dollar corporate debt deadlock. And to fund the huge costs of bank recapitalisation, it must sell its vast assets over coming years.
Foreign investors will be the main buyers. But if investors feel IBRA lacks transparency, or that inside information and fat bribes are needed for them to do deals, many will stay away. Analysts believe most top IBRA officials are genuinely commited to battling corruption and patching up the economy.
But the audit notes irregularities in the actions of some IBRA officials, as well as political meddling in IBRA. It also highlights a dispute between top officials, which led to a refusal to hire staff for some divisions and concerns about the impact of this on IBRA's performance. For investors, the document is a very uncomfortable read.