Joe Leahy, Hong Kong – The Jakarta stock market has a reputation for defying gravity and the first few weeks of this year have been no exception.
The benchmark Jakarta composite index has risen nearly 11 per cent since end-December even as efforts to impeach the country's leader, President Abdurrahman Wahid, for corruption have gathered speed.
"The main reason for the strong buying is because of what I call the 'impeachment effect'," said Lin Che Wei, research director at SG Securities Indonesia in Jakarta. "Whenever there is a government change in this part of the world you see the market rebound strongly."
Mr Wahid faces rising calls for his resignation after a parliamentary inquiry last week accused him of playing a role in two corruption scandals valued at about US$6m.
Parliament voted to send him a warning letter giving him three months to respond. If the house was still unsatisfied, a second letter would follow and it could begin to call a special session that would have the power to impeach him.
The prospect of Mr Wahid's removal has been greeted positively in markets – mirroring the reaction in the Philippines ahead of last month's removal of its former president, Joseph Estrada on corruption charges.
However, whether the rally can be sustained indefinitely was called into question on Tuesday. The Jakarta composite index fell 8.842 points, or 1.93 per cent, to end at 450.110 following a mass demonstration by Mr Wahid's supporters over the weekend.
"The picture is becoming clearer that President Wahid is unlikely to be removed in at least the next three or four months," SG's Mr Lin said.
A popular Muslim cleric, Mr Wahid was swept to power in 1999 in the country's first democratic process in more than 40 years. However, his popularity has since plummetted. Critics accuse him of economic mismanagement and failing to keep a promise to clean up Indonesia's notoriously corrupt political and business environment.
His government's slow progress on much-needed economic and corporate restructuring has also led it into conflict with its major creditors, particularly the International Monetary Fund and the World Bank.
"Every additional quarter of inactivity on corporate debt restructuring and asset recovery further weakens Indonesia's external position and mires the economy in the vicious circle of currency weakness, higher inflation and higher interest rates," warned Goldman Sachs in a recent report.
The investment bank predicted gross domestic product growth in 2001 would slip to 1.5 per cent from an estimated 3.7 per cent last year while inflation would nearly double to 7.0 per cent from 3.8 per cent a year earlier.
Attempts to prosecute for corruption the friends and family of Indonesia's former president Suharto, who fell from power in 1998, have also slowed, putting further pressure on Mr Wahid. "The political situation is likely to become less stable in first quarter 2001," Goldman Sachs said.
"Watch for more pressure to build on President Wahid to resign and for a political counter offensive. This should remain a major negative overhang on rupiah assets."
Mr Lin said the government is also facing another potential banking and corporate crisis with the country's second largest conglomerate, the Sinar Mas Group, teetering on the edge of bankruptcy.
One of the group's subsidiaries, Tjiwi Kimia, last week missed interest payments of US$43.3m on two senior debt issues. The Sinar Mas Group owes US$1.3bn to one of the country's major banks, Bank Internasional Indonesia, which is majority-owned by the government.
Mr Lin said the problem illustrates the ongoing danger of investing in Indonesian securities with or without the windfall of the "impeachment effect". "Fundamentally most Indonesian companies are very cheap on a bottom-up basis but on a top-down basis, the risks are still there."