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Web-only Exclusives
November 30, 2000

From Our Correspondent: Hirohito and the War
A conversation with biographer Herbert Bix

From Our Correspondent: A Rough Road Ahead
Bad news for the Philippines - and some others

From Our Correspondent: Making Enemies
Indonesia needs friends. So why is it picking fights?

Asiaweek Time Asia Now Asiaweek story

Resting on a Secure Base

The economy should survive the recent unrest

By Sangwon Suh and Assif Shameen


IT WAS NOT A pretty sight. Riot police and angry mobs locked in street battles. Buildings and vehicles blackened by fire. Workers scurrying from gleaming office towers because of bomb threats. Last week's turmoil in Jakarta sent jitters through financial markets and gave foreign investors normally bullish on Indonesia much cause to pause. Yet as far as the country's economic fundamentals are concerned, it is pretty much business as usual.

Unless things go drastically wrong, annual GDP growth will be between 7% and 7.8% in the next three years, according to a sampling of economists regionwide, not far off the 8.1% figure last year. Inflation is steady at just under 9%. As for the current account deficit, a big problem in many Asian countries, Indonesia's is projected to be no more than 3.8% of GDP this year and slightly above 4% in 1997. That compares with more than 8% eachfor Malaysia and Thailand. As it is, the bulk of imports are not consumer items but capital goods that will eventually boost production.

Foreign investment approvals in the first half of 1996 are nearly $21 billion, slightly up from the $19.4 billion recorded during the same period last year. Whether the recent turmoil will slow the momentum in coming months is unclear, but as a magnet for foreign investment, Indonesia is currently second only to China worldwide. Says Donald Hanna, regional economist of U.S. brokerage firm Goldman Sachs in Hong Kong: "The economy looks quite good, even though non-oil exports show a weakness."

There is the rub. Across the region, exports are on the decline, mainly because of a slump in electronics (see also BUSINESS, page 49). For Indonesia, there is an additional burden: despite the unrest, the rupiah has stayed relatively firm. For years, Jakarta has deliberately tried to depreciate the currency by about 5% each year to keep the country's exports competitive. This year, however, the rupiah has on the whole hardly moved against the U.S. dollar even though the greenback has strengthened against the yen and Euro-pean currencies. High domestic interest rates -- at nearly 18% -- are a big reason why. "Money has poured into Indonesia to take advantage of the yield differential," notes Manminder Singh of Nomura Research Institute in Singapore.

No fear. A slight slowdown is what the country needs. "Late last year, there was concern that the economy was growing a little too fast -- especially in consumer spending and in urban property," says Paul Alapat, an economist with Lehman Brothers in Hong Kong. "But now, overheating is no longer an issue." Also, because Indonesia is less dependent on electronics than its neighbors, the blow of the downturn has been softened. And higher oil prices in the first five months of the year have helped boost revenue from the country's petroleum exports. Liquefied natural gas exports are also doing well, and demand for plywood, pulp and paper is firming.

Deregulation has not hurt either. Since 1986, Jakarta has pursued a steady liberalization of trade and investment policies. The process has accelerated in recent years for two reasons: to meet the 2003 deadline set by the ASEAN Free Trade Area agreement; and to compete with other reforming countries vying for investment, like China and India. Import levies have been lowered, and non-tariff barriers such as red tape tackled.

To be sure, deregulation is not proceeding as fast or as extensively as it can. Many business sectors remain heavily protected, especially those controlled by Suharto's relations or friends. The awarding of contracts could do with greater transparency. And while privatization has picked up a little speed, the process is slower than that in Indonesia's neighbors. Analysts say Jakarta is taking advantage of the period up till 2003 to build up strategic domestic industries such as automobiles and petrochemicals. "The de-regulation has to be looked at in relative terms," says Hanna. "The variety of goods being imported today is vastly different from before, and that's a direct result of lower tariffs."

But the Suharto question is complicating matters. The president, more than any individual, is responsible for Indonesia's advances. "Here's a man who has taken his nation of nearly 200 million people from abject poverty to a reasonable level of prosperity," says Australia's former prime minister, Paul Keating. "[Suharto's critics] cannot name many countries that have had that sort of [performance]."

He is also the problem, however. "The economic story is now linked to the political story," says Alapat. "The issue of succession and what it will do to stability and economic growth is foremost in the minds of all foreign and domestic investors." And, he might add, of all Indonesians.


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