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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


Indonesia reaches an agreement with the IMF. Can Suharto stay the course?

By Cesar Bacani

Go to a chart comparing the region's countries' fiscal problems

Go to a story about commodity price controls in Indonesia

Go to advice on how to survive the coming financial storm

Go to an interview with Thai Deputy Prime Minister Virabongsa Ramangkura

KUSNI, A SMALL TRADER in Jakarta's Chinatown, has been waiting for hours outside Bank Harapan Santosa's glass headquarters. The bank was one of 16 shut Nov. 1 as part of a $33-billion rescue program arranged by the International Monetary Fund (IMF). "Bank Harapan said, 'we can give you a better interest rate, better security, better service,'" he complains. "Now look what happened." The government says depositors will get their money -- but only up to 20 million rupiah (about $6,000), which it says is how much most customers have. When? Notices outside the padlocked banks say state institutions will service withdrawals from Nov. 13.

Still, thousands of Indonesians continued to mill around the closed banks. "I just want to see the place where I put all my savings," says food vendor Handy, whose $12,000 with Bank Harapan is earmarked for his two children's university education. He could not go to college himself because his father lost his money in a bank failure. Others queued outside surviving banks to divide their deposits into 20-million-rupiah accounts. Some besieged Citibank and other foreign lenders with rupiah-filled plastic bags. "People are panicking," says Rosina Simon of HSBC James Capel in Jakarta. "In some areas of Jakarta, it is clear that they have lost confidence."

But there is also cautious optimism. "Things will get better," says Harun Hajadi, who runs a real-estate company. He says the IMF's entry and offers of aid from Japan, Singapore and other nations "show high confidence in the Indonesian government." Adds Parveen Gandhi, an executive vice president of Bank Bira, which remains open: "If Indonesia's economic fundamentals had been weak, those countries would not help." Hammered by Southeast Asia's currency crisis, the rupiah strengthened after Jakarta reached an agreement with the IMF, partly on aggressive buying by Japan and Singapore. The Jakarta stock market also staged a mild rally.

Now comes the hard part. "Jakarta has shown the political will to deal with the financial system, but it has shied away from providing many details," says Jardine Fleming regional economist Rajeev Malik. Bank Indonesia, the central bank, has yet to announce a comprehensive package of financial reforms. Then there is the issue of implementation. Three of the 16 banks closed are partly owned by relatives and associates of President Suharto. His second son, Bambang Trihatmodjo, who owns 25% of Bank Andromeda, is suing Finance Minister Mar'ie Muhammad and Bank Indonesia Gov. Sudradjad Djiwandono over the institution's closing. Warns one analyst: "If the case succeeds or other banks are reprieved, Bank Indonesia will be shown up as a toothless tiger."

The measure of confidence that Indonesia has regained rests on some solid planks. Under the IMF deal, the State Logistics Agency, known by its Indonesian acronym Bulog, will give up its monopoly on wheat, garlic and soybean in 1998, though it will remain in control of rice and sugar (see story, page 54). Foreign companies will finally be allowed to import their own products. Jakarta promised to phase out by 2000 tax breaks for car producers that achieve high local content. It also pledged to honor the World Trade Organization's decision on complaints by foreign car makers about special treatment for Timor, the national auto project of another presidential son, Tommy Suharto. Astra, a car company controlled by Suharto associate Mohamad "Bob" Hasan, may take over the project.

The money so far committed is also impressive. The IMF's contribution amounts to $10 billion, which can be used only for balance-of-payment problems. Between them, the World Bank and the Asian Development Bank pledged $8 billion for restructuring programs. Japan, Singapore, the U.S., Malaysia and Australia are making available $15 billion more. Additional assistance is expected from China and Hong Kong. The total dwarfs Thailand's $17.2-billion package. But Indonesians are worried. Jakarta's foreign debt already tops $107 billion. "How will we pay this?" asks Sentot Bhaskoro, a marketing manager.

The hope is that the new debt would pay for itself many times over -- if the three-year IMF program is carried out properly. Is Jakarta up to the task? Many are closely watching Bambang's moves and his father's response. "This is an attempt to sully our family name in order to indirectly topple my father, so that he won't be chosen president again," he told reporters. Bambang insists that Bank Andromeda is solvent. He admits that it broke central bank regulations by excessive lending to himself and other shareholders, but says 90% of Indonesian banks do it too.

Probosutedjo, a half brother of Suharto, is also refusing to sign the liquidation papers for Bank Jakarta. "My bank is very healthy in terms of cash flow," he argues. "How can it be bankrupt when I have assets that are 10 times bigger than those of the bank's?" Probosutedjo says his Le Meridien Hotel alone is worth $100 million. He also branded a government travel ban on owners of the closed banks a violation of human rights. Bambang and sister Siti Hediati Prabowo, who has a stake in Bank Industri, could have their travel rights restricted as well. Bank Harapan owner Hendra Rahardja is rumored to have fled to Hong Kong. (His brother is Eddy Tanzil, the key figure in a $600-million scam involving state bank Bapindo. Eddy escaped from a Jakarta jail last year.)

The banking sector can make or break Indonesia's economic recovery. "The difference between Indonesia and Thailand is the level of confidence," says Wanna Matanachai of Goldman Sachs in Hong Kong. "Indonesia has a history of bank closures like Bank Summa in the early 1990s. No bank, however bad its problems, has ever been closed in Thailand. Indonesians are jittery, and given the history, they have reason to worry." People expect other banks to fall. A list of 36 lenders whose licenses are allegedly being reviewed by the central bank is going the rounds in Jakarta.

Djiwandono has been quick to reassure the public. "The list is nonsense," says the central bank governor. "The banks that will be liquidated are only those 16 and no more." But industry sources say central bank officials had told them that at least 20 banks would be closed, with up to 40 others put on the watch list. "How they have gone down from 60 troubled institutions a week ago to 16 is beyond me," says a foreign banker. The queues last week may have something to do with it. "We expected panic, but what happened in the last two days has shaken us," says one prominent local banker, whose institution is considered one of Indonesia's best run.

The country's banks are not the region's strongest (see table, page 53). Most of the 239 lenders are small, and source funds from the interbank market because they do not have a substantial deposit base. They got squeezed when short-term rates soared to over 40% after the rupiah's devaluation in August. They are now faced with mounting loan defaults as high interest rates and the economic slowdown affect the ability of businesses to service their obligations. In addition to the rupiah loans, the corporate sector is estimated to have $65 billion in dollar-denominated debt.

The markets are waiting for word on how Jakarta plans to help the banks. Wan Hamdan Ismail at Morgan Stanley Asia expects forced mergers. "The larger, more profitable banks and listed banks with access to capital markets will be ordered to rescue smaller banks," he predicts. "This will be a drawn-out process of cleaning up loan books, restructuring companies, mergers and capital-raising." Jakarta has set aside 2.3 trillion rupiah -- $714 million -- to pay the depositors of the 16 closed banks. It hopes to get its money back by selling the lenders' assets.

How the needed banking reforms would be funded is an open question. "The good thing about the Indonesian package, which sets it apart from the Thai plan, is that there is a big chunk of bilateral assistance, giving the Suharto government a lot of flexibility," says Manmindar Singh, an economist with Nomura Securities in Singapore. Like other analysts, he praises Jakarta for its political will. "Indonesia did more than what everyone expected by giving way on Bulog and the Timor car," says Singh. Suharto must now prove his government really means it.

-- Reported by Assif Shameen and Yenni Kwok and Dewi Loveard / Jakarta

*Excludes Hongkong Bank. **Private banks only. ***National banks only. Source: Thomson BankWatch Asia

This edition's table of contents | Asiaweek home



U.S. secretary of state says China should be 'tolerant'

Philippine government denies Estrada's claim to presidency

Faith, madness, magic mix at sacred Hindu festival

Land mine explosion kills 11 Sri Lankan soldiers

Japan claims StarLink found in U.S. corn sample

Thai party announces first coalition partner


COVER: President Joseph Estrada gives in to the chanting crowds on the streets of Manila and agrees to make room for his Vice President

THAILAND: Twin teenage warriors turn themselves in to Bangkok officials

CHINA: Despite official vilification, hip Chinese dig Lamaist culture

PHOTO ESSAY: Estrada Calls Snap Election

WEB-ONLY INTERVIEW: Jimmy Lai on feeling lucky -- and why he's committed to the island state


COVER: The DoCoMo generation - Japan's leading mobile phone company goes global

Bandwidth Boom: Racing to wire - how underseas cable systems may yet fall short

TAIWAN: Party intrigues add to Chen Shui-bian's woes

JAPAN: Japan's ruling party crushes a rebel at a cost

SINGAPORE: Singaporeans need to have more babies. But success breeds selfishness

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