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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

Gearing For Trouble

Suharto will spend to avert potential unrest

By Jose Manuel Tesoro

Go to a chart comparing the proposed and previous budgets

TELEVISION CAMERAS AND TELEPHOTO LENS TARGETED President Suharto as he strode to the podium to read Indonesia's proposed 1998 budget to Parliament. They might as well have been microscopes for all the scrutiny given to his attitude and movements. The Jan. 6 budget speech was Suharto's most prominent public appearance since a two-week hiatus in December raised fears about the 76-year-old's health. As Indonesia begins one of its most troubling years in decades, all eyes were on the fitness of its leader.

There was little sign that anything was amiss. He read confidently and smoothly, and needed no assistance as he stood for nearly an hour. Yet the rupiah's value, which in recent weeks has dipped and risen on public perceptions of Suharto's health, continued to collapse. It closed at 7,250 to the dollar the day of the speech and reached 8,200 the day after.

The markets apparently cared as much about the content of his speech as its presentation. In drafting this year's budget, Indonesia's planners faced a tough choice: accelerate reform of the ravaged banking and business sector, whose woes and debts have exacerbated the rupiah's slide, or try to head off the social unrest likely to result from the recession. The decision seems to be more of the latter.

In the past two budgets, which were drafted in days of plenty, government expenditures increased less than 17% a year. But the budget for the 1998 fiscal year plots an expansion in spending of 32.1%, in part to cover subsidies for fuel and staple goods as well as outlays for development. Total spending will reach $18.4 billion, at the exchange rate prevailing Jan. 6. Some of the development funds may go to labor-intensive programs for the unemployed, while petroleum subsidies will increase more than threefold from last year, to $1.4 billion. Although Suharto admitted that fuel cannot be subsidized forever, he said prices can be raised only at "the right moment."

That moment is not now. Four days before Suharto's speech, a spokesman for the armed forces estimated that as many as two million Indonesians have already lost their jobs. Those who are still working have seen their purchasing power slashed by the rupiah's freefall, and fear traditional post-Ramadan bonuses may not be paid by troubled companies. "We are passing through tough times," said Suharto.

That is an understatement. The government -- and the army -- will have their hands full maintaining calm before the March presidential elections. The last thing they need is unrest triggered by unemployment or higher prices on crucial commodities. On Dec. 30, Jakarta even banned all exports of crude palm oil for the first quarter of this year, sacrificing foreign exchange earnings by local companies in order to keep cooking oil prices stable. The budget targets inflation at 9%.

Political reality demanded higher spending. Economic realities appear to have had less influence on the budget planners. That is what worries economists. The government used an exchange rate of 4,000 rupiah to the U.S. dollar to calculate, among other items, a 64% increase in payments to service its $108 billion foreign debt. With the rupiah at twice that level (as of Jan. 7), the prospect of Indonesia achieving its International Monetary Fund-mandated 1% budget surplus is uncertain. Even worse, the country may find meeting its dollar obligations onerous.

The budget also predicts GDP growth this year to hit 4%, and pins increases in revenues and tax receipts on that expansion. Yet few independent estimates of the economy put growth at more than 1% this year. Economist Rizal Ramli, head of Jakarta's Econit Research Group, is less concerned about the figures than "whether the budget itself conveys a strategic intent of policy reform starting from the top."

The most fundamental reform is restructuring the banks, many of which are overextended and undercapitalized. The week before the budget speech, the government announced that four state banks would be merged. "The toughest project is fixing the banks in a way that does not lead to monetary instability," says Tim Condon, Hong Kong-based chief economist for Morgan Stanley. "Until that happens, no one is going to be holding rupiah." And if the rupiah continues to fall, count on inflation to run rampant.

Suharto's top priorities are restoring the health of the banks and the value of the rupiah. "If this erosion goes unchecked," he said, "our economic foundations will crumble." Yet his statements failed to convince the markets, which were looking for detailed and dramatic measures, or stop the pummeling of the economy. The president looks fine. The same cannot yet be said about the country.

-- With reporting by Dewi Loveard / Jakarta

Indonesia's budget
(in trillions of rupiah)



Oil revenues 14.9 27.3
Value-added tax receipts 24.6 27.8
Total revenues 101.1 133.5
Petroleum subsidies 3 10.1
Debt-service payments 19.6 32.1
Total expenditure 101.1 133.5
Increase in expenditure 11.6% 32.1%

This edition's table of contents | Asiaweek home



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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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