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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

SEPTEMBER 24, 1999 VOL. 25 NO. 38

Indonesia Pays the Price
Savagery and scandal test the economy
By JONATHAN SPRAGUE and TOM McCAWLEY Jakarta

    ALSO IN ASIAWEEK
On the Firing Line
Habibie gives in to international pressure over foreign intervention -- but his problems are far from over

It's the Army, Stupid
Ramos-Horta on Indonesia's real problem

Indonesia Pays the Price
Savagery and scandal test the economy

Timor's Trail of Tears
Refugees face violence, starvation and exile

'We Were Surprised'
Ginandjar on East Timor and Bank Bali

  RELATED STORIES
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Breaking news from Southeast Asia

What a time to risk becoming a global pariah. Indonesia's economy has been showing signs of stability. GDP growth is expected to be nearly flat in 1999 (against 1998's 13% dive) and rebound 3% in 2000. Suddenly, everything is being held hostage by the crisis in East Timor -- a pimple in Indonesia's national economy with no industry or resources to speak of. The International Monetary Fund suspended discussions with Jakarta on its economic program. The World Bank warned that $5.9 billion in donor aid it is coordinating depended on progress in East Timor. With official loans and aid at risk, rating agency Standard and Poor's said it may downgrade Indonesia's credit worthiness. Investors are on tenterhooks. "The situation in East Timor has already had an enourmous impact on market sentiment," said vice president Shin Myong Ho of the Asian Development Bank. "If the issue is not resolved to the satisfaction of the international community, it will affect [Indonesia's] macro-economic stability and short-term prospects."

President B.J. Habibie's decision to let U.N. peacekeepers into the violence-wracked territory may avert the worst for the economy. "If there is a peaceful handover of power to the U.N. with a minimum of [further] bloodshed, East Timor will become a non-issue [for the economy]," says David Chang, research director at Trimegah Securities in Jakarta. But that will not be the end of the economy's woes. Investors are also worried about the rift between the Habibie administration and the military that the events in East Timor exposed. The rupiah briefly crashed to more than 9,000 versus the dollar last week on coup rumors before recovering to around 8,000. But most of all, investors are concerned about the unfolding Bank Bali scandal. The affair centers on a $70 million "commission" the bank paid to a former vice treasurer of the ruling Golkar party to get back some $120 million in interbank loans frozen by Jakarta. Some of the cash may have been meant for Habibie's re-election campaign, a charge the president has denied.

The possibility that top government leaders were milking Bank Bali at a time when international lending agencies and aid donors are pouring billions into Indonesia to prop up the economy and restructure the financial system has infuriated the IMF, World Bank, ADB and practically everybody else. "It is a major case of corruption and therefore very important for the IMF," the fund's Asia-Pacific director Hubert Neiss said. "Remember, the IMF program from the very beginning had anti-corruption measures as a major element." The scandal has cast in doubt not only the longevity of the Habibie administration but the credibility of Jakarta's entire effort to clean up its financial system, shaking official and private willingness to fund Indonesia's economic recovery. "Everybody knows that East Timor will eventually be solved," says Raden Pardede, head of economic research at Danareksa Securities in Jakarta. "But Bank Bali goes to the heart of the problem." The problem: Can Jakarta be trusted? East Timor and Bank Bali seem to argue, no.

This edition's table of contents | Asiaweek home

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