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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

GROUND ZERO IN ASIA'S CRISIS

Its economy at a virtual standstill, Indonesia announces new banking and debt-repayment initiatives. Don't expect the initial euphoria to last

By Cesar Bacani


Go to a list of suggestions to get the country moving

Go to an interview with Bank of Indonesia Governor Sudradjad Jiwondono

Go to a story about social unrest

Go to a story about B.J. Habibie

Go to a story about the political opposition

Go to a story about the effect of Indonesia's problems on Singapore

INDONESIA'S CUSTOMS OFFICERS are a suspicious lot these days. They have been discovering scads of rupiah stuffed in socks and waist pouches of departing passengers. Six people in the western city of Medan were recently stopped from boarding a flight to Singapore. They were taking out 271 million rupiah (about $27,000) -- far exceeding the limit of 50,000 rupiah per person. In Jakarta, four men also bound for the neighboring financial center were nabbed while lugging 204 kg of gold bullion valued at $1.5 million. "Our offices have been overwhelmed with deposits," says an official with a foreign bank in Singapore. "Some come with suitcases full of rupiah. Others make periodic [electronic] remittances."

An investment banker in Jakarta says he has lost $40,000 in the last two weeks as the exchange rate fell as low as 17,000 rupiah to the greenback (from 2,450 in July). He is asking friends who are paid in U.S. dollars to come to him if they need rupiah. Businesses are desperate too. "All U.S. dollar lines of credit to local banks have been cut," says a senior official of a foreign bank. Very few Indonesian letters of credit are being honored, so most trade financing is at a standstill. Billions of dollars in foreign-denominated loans are not being serviced. "Conglomerates here are at a dead end," says tycoon Sofyan Wanandi.

Welcome to ground zero in Asia's seven-month-old crisis. Thailand and South Korea are also bombed out, but Indonesia seems terminal. The pain of the country's 200 million shell-shocked citizens is only beginning. As part of its second-chance deal with the International Monetary Fund (IMF), the government is to stop subsidizing fuel and electricity on April 1. There goes the artificially low prices of gas, cooking oil, bread and other commodities that have made life bearable to the country's hardscrabble millions. Already, some 2 million people are said to have lost their jobs in the past six months. Riots have erupted over spiraling consumer prices (see story page 24).

Everyone is waiting to see what President Suharto and his economic managers will do. "If they don't have an ace up their sleeve, we're all in trouble," says Jonathan Harris of securities firm HSBC James Capel in Jakarta. On Jan. 27, the government pulled out two cards. It announced proposals to extend state guarantees on all bank deposits and loans, including foreign-denominated borrowings, and created an autonomous body to rehabilitate troubled banks. Moving on the private sector's mountain of foreign debt, Jakarta promised to form a committee of Indonesian borrowers to meet with a group of international lenders. The government hopes the two sides will be able to hammer out a repayment plan acceptable to all creditors and debtors.

Good moves, but don't expect the euphoria to last. "There are two issues that Indonesia needs to address," says Zafer Achi, country head of international management consultant Booz-Allen & Hamilton in Jakarta. "One is the problem of short-term corporate debts. The other is the need to convince the investor community that the political uncertainty will be dealt with appropriately." The government must also deliver on promises to dismantle monopolies and stop costly infrastructure projects, including those backed by Suharto's family. Unfortunately, there is little clarity about the political succession -- and much skepticism over the 76-year-old president's will and ability to push through with reforms.

That is also Asia's dilemma. Singapore, whose well-run service economy is linked to that of its huge neighbor, could no longer keep its fears private. Departing from the ASEAN policy of not commenting on members' internal affairs, Singapore Deputy Premier and Defense Minister Tony Tan warned Jan. 26 that "uncertainties over the political situation" in Indonesia are roiling the region's markets. "This will hamper any recovery in the Asian economies," he worries. Says Philippine Foreign Secretary Domingo Siazon: "We in ASEAN are watching the situation in Indonesia. The short-term borrowing of the private sector there is very high. Also critical is when President Suharto announces who his vice president will be."

The world is also watching, though perhaps not as closely as it should. The U.S. is preoccupied with charges that President Bill Clinton had a sexual relationship with a White House intern -- and that he told the young woman to lie about it. One potential casualty: Clinton's campaign for Congress to approve $18.5 billion in extra American contributions to the IMF. The president tried to sell the idea in his State of the Union address Jan. 27. "Because the turmoil in Asia will have an impact on all the world's economies, including ours," he said, "making that negative impact as small as possible is the right thing to do for a safer world." The measure faces stiff opposition in the Republican-dominated Congress.

A lot is riding on Indonesia. Most analysts initially thought the country would be the first to emerge from the crisis. That belief was buttressed when Suharto voluntarily called in the IMF in October, saying Indonesia wanted the Fund's expertise, not really its cash. But the issue of succession took the spotlight in December when Suharto's failing health forced him to absent himself from the ASEAN Summit. The announcement of the 1998 budget in January completed the demolition job on investor confidence. The spending plan would not produce a 1% surplus, one of Indonesia's commitments to the IMF.

A revised budget that explicitly promised adherence to new IMF conditions was later unveiled, but the rupiah continued to fall. Indonesia hopes its new banking and debt initiatives will reverse the negative sentiment. The currency did rebound to just over 10,500 to the dollar Jan. 27, from 17,000 five days earlier. But that is not enough. "At 10,000 or 11,000 to the dollar, just about everything in Indonesia is wiped out," Manmohan Singh of Nomura Securities in Singapore points out. Says Deborah Schuler, a banking analyst with ratings agency Moody's Investors Service: "The rupiah won't stabilize until there is a proper plan to renegotiate corporate debts."

She sees the latest measures as a useful first step. Foreign lenders are now assured that they will get back the estimated $10 billion to $15 billion they lent to Indonesian banks. The state guarantee does not cover some $50 billion more in corporate debts, but the government has at least taken the lead in starting creditor-debtor talks. It also plans to temporarily suspended all repayments while the two sides negotiate. "This sounds like a moratorium, smells like one, maybe even looks like one," says Wan Hamdan Ismail of Morgan Stanley in Singapore. "But this means it is finally dawning on the Indonesians that they must be seen to be doing something."

Up to a point, capital flight may also be stemmed. "People have been withdrawing money to put under the mattress or take out of the country," says Schuler. "By guaranteeing deposits, the government will see some money return to the banking system. Until the latest measures were announced, the entire Indonesian financial system was illiquid. Companies could not get working capital, importers could not get letters of credit, exporters could not get financing. If you sign a check, nobody could tell if it would be honored. We are coming from almost the edge, so even a small step forward is such a breath of fresh air."

The proposals come with a cost. Jakarta's exposure can run to billions if its guarantees are called. Some analysts say bad bank loans may rise to more than 25% of total lending by 1999. Restructuring, mergers and acquisitions -- Jakarta has also decided to allow 100% foreign ownership of banks -- are sure to follow. Indonesia's Japanese, European, Korean and Singaporean creditors will take big hits too. "Banks probably won't get 100 cents to a dollar," says Manu Bhaskaran of SocGen-Crosby Securities in Singapore.

The big question is whether the banks would be willing to restore credit lines. Bhaskaran is skeptical. The best the country could do is to clear the debt mess quickly so the process of rebuilding credit-worthiness could start. Don't forget the risk of social instability. With the subsidies removed, many economists expect 50% to 100% inflation -- the revised budget assumes 20%. Morgan Stanley predicts a 9% contraction in GDP this year. "You can announce all sorts of measures, but Suharto is still there and Indonesia is still a powder keg," says Sanjoy Chowdhury of Fraser-AMMB Research in Singapore.

What about the neighbors? Confidence is returning in South Korea, which has signed an $57-billion rescue package with the IMF. On Jan. 27, Korean borrowers and their creditors agreed to restructure $20 billion in short-term private-sector debt. (Total foreign borrowings: $153 billion.) "Though debts remain high in Korea, there is confidence they will be eventually repaid," says Lynn Exton of Merrill Lynch. Thailand, too, is recovering. "They have the right policies, which is why the IMF is willing to be more flexible," says Kanika Singh of British consultancy IDEA. Finance Minister Tarrin Nimmanhaeminda recently visited the U.S. to plead his case on easing some of the IMF's prescriptions.

Malaysia is not under an IMF program, but it has taken Fund-like measures such as cutting infrastructure spending. Recent interest-rate hikes, meant to defend the currency and trim credit growth, are having a positive impact. The Philippines hopes to leave 35 years of IMF supervision this year. The peso has been relatively stable, suggesting to Finance Secretary Roberto de Ocampo that "some delinking from the beleaguered currencies of our neighbors" is starting. "Our banking system remains healthy," says the technocrat, who is stepping down to run for senator in May elections. "Export growth is very healthy at 22%. And while the expectation in 1997 was a large fiscal deficit, we ended up with a surplus."

Don't think the worst is over. "We have had our string of good news," cautions Bhaskaran. "But let's do a reality check. Corporate balance sheets [in Indonesia and elsewhere] are still in terrible shape. The banking crisis is still there. The credibility of many government policies is still a question mark." Clinton's domestic troubles -- pundits are talking of impeachment -- are hampering his ability to exercise leadership. Japan is grappling with problems of its own, which could potentially rock the global financial system. And China, whose economy is still humming, is seeing rising unemployment as it reforms its shaky banks and state enterprises.

In the end, Asia must fall back on itself. Let us not lose all perspective, says Schuler. Indonesia has oil and timber resources that can bring in the foreign exchange needed to keep the economy running while economic and political restructuring is taking place. And what about Asia's vaunted resilience and capacity for hard work? Harnessed by respected and capable political leaders, these and other qualities can see the region through the dark days ahead. Now, Mr. Suharto, about that smooth transfer of power . . .

-- Reported by Jose Manuel Tesoro / Jakarta, Assif Shameen / Singapore, Antonio Lopez / Manila, Julian Gearing / Bangkok, Santha Oorjitham / Kuala Lumpur and Laxmi Nakarmi / Seoul


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