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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

HARD WORK AHEAD

Will an elected government bring the security investors demand?

By Assif Shameen and Ricardo Saludo


Indonesia's Elections: History in the Making Endgame The jockeying begins as the vote count plods on

Casualty Targeting the attorney-general

Economy Getting better but still rough

Interview The IMF's Indonesian agenda

Elections Who says democracy is better?

previous stories
Decision '99 Only a slow vote can spoil Indonesia's free and triumphant elections

The Parallel View Flashback to the 1955 ballot

Money Talked, But How Loudly? Accusations fly that Golkar and others misused funds to woo voters
WHICH IS THE BEST-PERFORMING stock market in Asia in the past 10 weeks? No, not Korea - it's Indonesia. Plainly, the memory of blood in Jakarta's streets and a rupiah down 85% against the dollar have faded. Since early April, nearly $1.5 billion from U.S. investment funds have poured in. The rupiah, once 17,500 to the greenback, neared 7,200 last week, up more than 30% in just three months. The collective hope of investors: Indonesia is set for stable politics and a new coalition government with the clout to stay the restructuring course.

For Manu Bhaskaran, a director at SG Securities Asia in Singapore, the election results are fairly encouraging, with Indonesians voting for moderation and an alliance with broad support likely to arise. Besides, the International Monetary Fund will still vet major macroeconomic policies. Anoop Singh, the IMF's deputy director for Asia and the Pacific, sees "no reason to think [the program] will not continue as planned." Indeed, the latest review of Indonesia's program by Fund experts in Washington, completed on June 7, called for "a stringent, accelerated program" for recovering soured loans and doubtful assets, to be launched in three months. "We see no reason why this won't happen," says Singh.

Robert Rountree of Prudential-Bache Securities in Hong Kong isn't so sure. Despite Megawati Sukarnoputri's avowed backing for the IMF program, Rountree cautions: "Just because the elections were peaceful and Megawati's party took an early lead, it doesn't mean political problems are solved, let alone that there is consensus on how to tackle economic problems. The reality is Indonesia has a painful climb back." After an almost 14% contraction last year, Jakarta now forecasts between -2% and zero growth this year, with no positive numbers in sight until 2000. At these rates, GDP is tipped to fall to 1994 levels by mid-2001 - seven lost years.

Probably the biggest drag on growth is the mammoth overhang of defaulted debt, which restricts both lenders and borrowers. Even sectors that ought to boom, like exporters, can't get enough financing. But clearing the bad-debt load will itself soak up resources needed for expansion - as much as 82% of GDP, according to U.S. credit-rating agency Standard & Poor's. That bill dwarfs Thailand's 35% and South Korea's 29%. And the cost is rising every day, as interest continues to pile up on the soured loans, which make up over three-quarters of all lending. S&P fears it could take 10 years to bail out all banks. The agency and the IMF both urge better debt collection. On June 15, the bank restructuring body's website listed all its 1,689 debtors and the amounts they owe.

Singh, No. 2 to the IMF's Asia chief Hubert Neiss, notes some progress in revitalizing banks. Jakarta recapitalized 23 private-sector ones, using some $13 billion raised through bonds. But state banks are the real headache; they hold three-quarters of all loans. There is some relief from lower interest rates - down to 20%-25%, from 30%-50% in December, and they could fall further. Foreign investors may also help by buying troubled banks or government firms being privatized. However, with over 75% of all loans deemed non-performing, the cost will be gargantuan, even in the best case. Add to that the enormous spending needed to provide social safety-nets and boost domestic demand.

One bright spot has been the inflation picture: the central bank forecasts 10%-13% this year, and private projections, 18% (1998: over 60%). Foodstall owner Maryamah is happy that sugar now costs 3,500 rupiah, less than half the price last year. With costs moderating, so are interest rates, from as high as 80% on commercial loans. Bank Indonesia, the central bank, expects its own deposit certificates to pay as low as 17% within nine months, depending on U.S. rates. And the IMF is allowing a budget gap of 3.7% of GDP.

In the end, however, people and firms need to produce and sell for growth to happen. Happily, oil and gas prices have recovered by 40% over the past year. Non-petroleum exports are also up as trade financing has become less of a hassle. Most economists expect non-oil manufactured exports to pick up more dramatically. Agriculture is also rebounding. "The weather has been good," says Bhaskaran. "As production rises, so will incomes. Don't forget: 50% of Indonesians live in rural areas." Those producing coffee, rubber or palm oil for export benefit from the weak rupiah. Consumption, once damped by political fears, is also picking up. "It will be a long time before consumer confidence returns to pre-Crisis levels," Bhaskaran says, "but there is substantial improvement."

Political stability may also lure business people and investment, including ethnic Chinese entrepreneurs. Garuda Food CEO Sudhamek A.W.S. is banking on the new elected government: "The economy is better if the politics is better." In the medium to long term, says Bhaskaran, "once the Chinese start returning with their capital and expertise, Indonesia will be in a steadier growth phase." However, social peace will be hard amid appalling poverty and inequity. University of Indonesia economist Didiek Rachbini warns of revolution if these ills are not addressed. Bhaskaran expects "affirmative action for pribumis" as well as more resources for poor regions. For the election winners, the real work has just begun.

- With reporting by Yenni Kwok/Jakarta


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