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COUNTRY REPORT

Indonesia

4th quarter 1998

The Economist Intelligence Unit15 Regent Street, London SW1Y 4LRUnited Kingdom

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ISSN 0269-5413

Contents

3 Summary

4 Political structure

5 Economic structure

6 Outlook for 1999-2000

11 Review11 The political scene18 Economic policy25 The economy29 Sectoral trends31 Finance and banking35 Foreign trade and payments

41 Quarterly indicators and trade data

List of tables8 Forecast summary

10 Economic results and forecasts18 Maximum guaranteed interest rates, 199819 Budget summary22 Turnover of the top 20 conglomerates23 External debt, end-Mar 199826 Gross domestic product growth by sector, 199826 Gross domestic product growth: performance and forecast27 Official growth forecasts for 199827 Farmers’ terms of trade, Sep28 Consumer price index, 199835 Six banks’ capital requirements, end-Oct 199836 Merchandise trade36 Top ten manufactured exports, Jan-May37 Top ten exports37 Imports by category, Jan-Jul38 Current account, Apr-Sep39 Gross foreign assets, 199841 Quarterly indicators of economic activity42 Foreign trade

Indonesia 1

EIU Country Report 4th quarter 1998 © The Economist Intelligence Unit Limited 1998

List of figures10 Gross domestic product10 Rupiah real exchange rates18 One-month SBI auction interest rates, 199835 Equity prices and the exchange rate, 1998

2 Indonesia


December 4th 1998 Summary

4th quarter 1998

Outlook for 1999-2000: The president has not been able to widen his base,but a return to authoritarianism looks unlikely. Next year’s elections may notprovide a stable solution. The economic stabilisation is fragile, and recoverywill be slow even on optimistic assumptions for inflation and the rupiah. Thecurrent account will remain in unaccustomed surplus.

The political scene: Mr Habibie has been losing support. His reformist agendahas failed to convince the opposition and violence has been mounting. In thewake of a turbulent session of the People’s Consultative Assembly the presidenthas made some concessions on next year’s electoral timetable. Parties have beenproliferating and coalescing. Megawati Sukarnoputri’s PDI Perjuangan has helda congress. Pressure for an investigation into Suharto’s wealth has been rising.

Economic policy: Falling interest rates have been underpinned by capitalinflows and lower inflation. The budget went into unexpected surplus in thefirst half of 1998/99. Privatisation receipts have been lagging and the pro-gramme has been cut back. Several conglomerates have been under attack. Thebankruptcy law has got off to a shaky start. There are faint hopes that thecomplex private debt issue will be resolved. Sovereign loans have become softerand some have been rescheduled.

The economy: The economy has still not bottomed out. The impact of thecrisis on ordinary people has been uneven and its depth is disputed. Fallingfood prices have brought inflation down. Foreign investment approvals havebeen surprisingly strong, but implementation is in doubt.

Sectoral trends: Agriculture has not escaped the crisis. A complex problemconcerning the rice supply has eased. There has been a collapse in car sales.Tourism has not benefited from the weak rupiah. A massive oversupply ofcement looms.

Finance and banking: A new banking package, containing the govern-ment’s recapitalisation plan, has been announced. A dispute over the repay-ment of liquidity assistance has been a test for the Indonesian BankRestructuring Agency (IBRA). Audits have revealed that few banks meet the 4%capital-adequacy ratio requirement. The stockmarket has begun to climb back.

Foreign trade and payments: The trade surplus has ballooned as someexports have prospered and the import collapse has continued. The currentaccount is heading for a healthy surplus. Trade finance is not being taken up.The haemorrhage of reserves has stopped. The rupiah has appreciated andstabilised.

Editor: Leo AbuzzesseAll queries: Tel: (44.171) 830 1007 Fax: (44.171) 830 1023

Indonesia 3


Political structure

Official name Republic of Indonesia

Form of government Strong presidential government based on the state ideology of Pancasila

The executive The presidency is highest executive office, with direct legislative powers and authorityto appoint the cabinet; the president is elected for a five-year term by the People’sConsultative Assembly (Majelis Permusyawaratan Rakyat, MPR); last cabinet reshuffleMay 22nd 1998

Head of state The president, Bacharuddin Jusuf Habibie. The MPR is nominally the highest authorityin the state. It consists of members of the elected House of People’s Representatives(Dewan Perwakilan Rakyat, DPR) and appointed members, and elects the presidentand vice-president. The DPR must approve all laws. The size and composition of bothbodies will be changed by legislation to be approved before the next general election.

National elections May 1997 (DPR), March 1998 (presidential); next DPR elections expected in June 1999,to be followed before the end of the year by a presidential election

National government Suharto stepped down as president on May 21st 1998 after 32 years in power, he wassucceeded by his vice-president, B J Habibie; Golkar controls 325 of the 500 seats inthe DPR

Main political organisations Until recently only three parties were recognised, the majority Sekretariat BersamaGolongan Karya (Golkar) and two minority parties—Partai Persatuan Pembangunan(PPP; coalition of previously Muslim parties) and Partai Demokrasi Indonesia (PDI;coalition of previously non-Muslim parties). Since Suharto’s resignation more than 100new parties have been formed. The most important are: PDI Perjuangan; the NationalAwakening Party (Partai Kebangkitan Bangsa, PKB); the National Mandate Party (PartaiAmanat Nasional, PAN); and the Moon and Star Party (Partai Bulan Bintang, PBB)

President Bacharuddin Jusuf HabibieVice-president vacantCo-ordinating minister for defence & security General Feisal TanjungCo-ordinating minister for economics, finance & industry Ginanjar KartasasmitaCo-ordinating minister for development supervision & state administrative reform Hartarto SastrosunartoCo-ordinating minister for people’s welfare & poverty alleviation Haryono Suyono

Key ministers Agriculture Sholeh Salahuddin Defence & security General WirantoFinance Bambang Subianto Foreign affairs Ali AlatasHealth Farid Antara MulukHome affairs Lieutenant-General Syarwan HamidIndustry & trade Rahardi RamelanInformation Lieutenant-General Yunus YosfiahInvestment Hamzah Haz Justice Muladi Mines & energy Kuntoro Mangkusubroto Research & technology ZuhalState enterprise rehabilitation Tanri AbengTourism, arts & culture Marzuki UsmanTransport Haryanto Dhanutirto

Central bank governor Syahril Sabirin

4 Indonesia


Economic structure

Latest available figures

Economic indicators 1993 1994 1995 1996 1997a

GDP at current market prices (Rp trn) 329.8 379.2 452.4 532.6 624.3

Real GDP growth (%) 7.3 7.5 8.2 8.0 4.6

Consumer price inflation (av; %) 9.2 9.6 9.4 8.0 7.5

Population (m) 187.6 190.7 193.8 196.5 200.1

Exports fob ($ bn) 36.6 40.2 47.5 50.2 56.3

Imports fob ($ bn) 28.4 32.3 40.9 44.2 46.2

Current-account balance ($ bn) –2.11 –2.79 –6.43 –7.66 –4.89

Reserves excl gold ($ bn) 11.26 12.13 13.71 18.25 16.59

Total external debt (disbursed; $ bn) 89.15 96.54 107.83 109.34 137.30

Total external debt-service ratio, paid (%) 34.3 32.1 32.6 34.2 37.0

Exchange rate (av; Rp:$) 2,087 2,161 2,249 2,342 2,909b

December 4th 1998 Rp7,550:$1

Origins of gross domestic product 1997 % of total Components of gross domestic product 1997 % of total

Agriculture 16.1 Private consumption 62.2

Mining & quarrying 9.5 Government consumption 6.8

Manufacturing 25.6 Gross fixed capital formation 28.7

Construction 7.5 Change in stocks 2.9

Trade, hotels & restaurants 16.7 Exports of goods & non-factor services 27.9

Transport & communications 6.8 Imports of goods & non-factor services –28.5

GDP at market prices incl others 100.0 GDP at market prices 100.0

Principal exports fob 1997c $ m Principal imports cif 1997c $ m

Crude oil & products 6,783 Machinery & transport equipment 17,573

Natural gas 4,820 Other manufactures 6,491

Plywood 3,411 Chemicals 5,913

Ready-made garments 2,880 Fuels & lubricants 4,047

Textiles 2,389 Food, drinks & tobacco 3,223

Rubber 1,929 Raw materials 2,979

Total incl others 53,547 Total incl others 41,680

Main destinations of exports 1997 % of total Main origins of imports 1997 % of total

Japan 23.3 Japan 19.8

US 13.3 US 13.1

Singapore 10.2 Singapore 8.2

South Korea 6.6 Germany 6.3

China 4.1 Australia 5.8

Netherlands 3.4 South Korea 5.6

a EIU and official estimates. b Actual. c Customs basis.

Indonesia 5


Outlook for 1999-2000

The president has notbeen able to widen his base

Six months after taking office from Suharto, B J Habibie, still looks like apresident by default. Despite some clear attempts to distance himself from hismentor, Suharto, and some genuinely reformist gestures—ranging from therelease of political prisoners to the opening up of the party system—he is toocompromised by his past association with the former president to be trustedeven by moderate reformers such as Amien Rais (the de facto leader of thepopular opposition which toppled Suharto in May 1998), who is prepared totolerate him as a transitional figure, much less by advocates of “total reform”such as the students who are calling for his immediate resignation. It is noteven clear whether he can rely on the support of those in government withhim. Several members of his cabinet are thought to harbour their own pres-idential ambitions. The new leadership of his supposed political vehicle,Golkar, is rumoured to be thinking of supporting someone else in next year’spresidential election. There is growing pressure on him from moderate oppos-ition politicians to declare that he will see out the transitional process but willnot himself stand for the presidency next year.

His closest allies aredoubtful assets

Aside from an inner coterie of cabinet ministers and advisers, President Habibiehas alliances of convenience with the armed forces commander, GeneralWiranto, and various conservative Muslim groups. Neither of these allies par-ticularly likes the other: there is a long history in Indonesia of mutual suspicionbetween secular military men and Muslim activists. Moreover neither alliancegreatly enhances Mr Habibie’s appeal. General Wiranto’s reputation was seri-ously tarnished by the conduct of the security forces during the Novembersession of the MPR, when several students were shot dead. The high commandhad hitherto tried to blame the catalogue of military abuses that has come tolight since Suharto’s resignation on rogue elements in the armed forces, usuallyby linking them to the disgraced former commander of the special forces andson-in-law of Suharto, Major-General Prabowo Subianto, and his allies. WithGeneral Prabowo discharged from the army in August for alleged involvementin the kidnapping of political activists earlier this year, the persistence ofmilitary abuses suggests either that Prabowo’s influence lingers on or thatabusive behaviour is more widespread than the high command admits. Eitherpossibility points to the limits of General Wiranto’s authority in the armedforces.

His Muslim backers see Mr Habibie as their best hope for the installation of agovernment more attuned to Islam. But the groups involved are small and, astheir followers’ clashes with students during the special session of the People’sConsultative Assembly (Majelis Permusyawaratan Rakyat, MPR) in mid-November illustrated, they are more likely to embarrass Mr Habibie than toprove an asset to him. The lynching of Christians and the sacking of churchesin Jakarta the week after the MPR session and the revenge killings committedby Christians in the predominantly Christian eastern Indonesian province ofWest Timor has highlighted the real dangers of sectarianism.

6 Indonesia


A return toauthoritarianism looks

unlikely

In view of his narrow support base, it is unlikely that Mr Habibie will abandonhis plans for a process of transition involving parliamentary and presidentialelections next year in favour of a return to authoritarianism with militarybacking. To do so would probably end the conditional support that he nowdraws from a variety of sources, including cabinet ministers, the parliamentaryleadership and Golkar (3rd quarter 1998, page 13). There are several possibleflashpoints as the process leading to the election of a new president unfolds;the most explosive will probably be the campaigning period leading up to theparliamentary election next June, when several dozen parties are likely to becontending for votes in Indonesia’s first open election since 1955. The actualscale of the probable violence will clearly have a bearing on the options opento the government in practice. But in the most likely scenarios the costs of areturn to authoritarianism will outweigh any notional benefits. It seems morelikely that Mr Habibie will seek to mollify as many of his critics as he can ratherthan suppress them. This was the strategy adopted in the wake of the Novem-ber MPR session when the president made a number of concessions to theopposition, including accelerating the electoral timetable by moving the datefor the full MPR session which will elect the next president from December1999 to August 1999.

The moderate oppositionmay form a broad tactical

alliance—

Partly because Indonesia has not had anything resembling a free election for solong, predicting the final outcome of the extended electoral process remainsdifficult. In preparation for the parliamentary election alliances are still beingformed. The alliance based on PDI Perjuangan, the party chaired by the daugh-ter of former President Sukarno, Megawati Sukarnoputri, and the NationalAwakening Party (Partai Kebangkitan Bangsa, PKB), formed by leaders of thecountry’s largest Muslim social organisation, Nahdlatul Ulama (NU; 3rdquarter 1998, page 7), has broadened further in the past quarter to include twoorganisations led by former Golkar sympathisers. Together this alliance is likelyto take the largest share of the vote in the parliamentary election.

—but it is unlikely to belasting

The alliance could conceivably also broaden again to include Amien Rais’sNational Mandate Party (Partai Amanat Nasional, PAN). The prospect of vio-lence during the November MPR meeting ended a long estrangement betweenAmien Rais and Abdurrahman Wahid of NU, if only for the duration of thesession. If as the election campaign gets under way violent confrontation be-tween the political extremes becomes a reality and there are again signs, asduring the November MPR session, that it is being fanned by the forces of thestatus quo (comprising principally the president and the armed forces), theattraction of reconstituting such a broad-based alliance would increase. Similarreasoning underlies the case for Megawati and Amien Rais joining forces in thepresidential contest. Opinion polls suggest that a Megawati-Amien Rais pres-idential candidacy would be a popular combination (although the publicwould prefer Amien Rais to Megawati for president). However, although figuresas disparate as these two may be able to enter into working tactical alliances, itis less clear whether they could successfully work in tandem as president andvice-president. A consensual presidency, uniting the broad moderate oppos-ition, therefore looks an unlikely outcome.

Indonesia 7


A fragile stabilisation— By the end of the fourth quarter there are hopes that the economy has begunto stabilise. Since September the rupiah has strengthened by around 40% andhas settled in the Rp7,000-8,000:$1 range. The stronger rupiah and the improv-ing availability and distribution of staple foods caused prices to fall in Octoberand to stabilise in November. Since early September too, rates on one-monthBank Indonesia Certificates (Sertifikat Bank Indonesia, SBIs) have been falling,pulling discount and lending rates down as well.

Underlying these developments have been the weakening dollar, the largeinflows of official capital that have been made possible by the resumption ofthe IMF programme since July, and the pledge of further quick-disbursingassistance, and the easing of the food procurement and distribution problemsthat sent prices soaring in August-September. There have also been signs thatmoney supply growth is coming under control, as two of the main sources ofmonetary expansion—Bank Indonesia liquidity assistance to the banks andliquidity credits to support the subsidies programme—both stabilise. By lateNovember net domestic assets, the monetary magnitude targeted under theIMF agreements, was well below the adjusted IMF target, and year-on-year ratesof money-supply growth have been falling.

—encourages hopes of aslow recovery

The permanence of this stabilisation is still in doubt. It could be blown offcourse by a number of developments. The government is committed to a heavyspending programme in the second half of the fiscal year (October-March), inwhich foreign aid will play an important role. Although these inflows willsupport the rupiah, they will also be inflationary. The costs of the impendingbank recapitalisation programme will weigh heavily on the economy, and itsfinancing will also create inflationary pressure. As Mr Habibie’s predecessorfound out, stabilisation is also vulnerable to sudden shifts in market sentimentset off by political events or an interest rate cut too far. By late 1999 as theeconomy bottoms out, two factors that have helped strengthen the rupiah—the weak dollar and the thin market in foreign exchange—will no longer be atwork, posing another threat to stabilisation.

Forecast summary($ m unless otherwise indicated)

1997a 1998a 1999b 2000b

Real GDP (% change, year on year) 4.6 –14.8 –2.4 1.0

Consumer price inflation (av; %) 7.5 55.0 12.8 7.0

Merchandise exports fob 56,297 53,993 53,944 54,378

Merchandise imports fob 46,223 37,746 36,532 37,664

Current-account balance –4,890 3,242 5,623 4,553

Average exchange rate (Rp:$) 2,909c 10,078 8,000 7,619

a EIU and official estimates. b EIU forecasts. c Actual.

Assuming that the economy continues to stabilise, as we forecast, the processof recovery will still be slow. The preconditions for a recovery are that a func-tioning banking system is recreated, the infrastructure required for resumedexport growth is in place, and the problem of the massive private debt over-hang is resolved. A government capable of protecting the economically strat-egic ethnic Chinese community will also be important to economic revival. It

8 Indonesia


is also necessary that, while these issues are being tackled, a social safety net isin place to minimise the attendant hardship.

The recovery will beanaemic—

Against this background the EIU does not expect the economy to grow againuntil 2000, and even then we are forecasting very moderate growth of 1%. In1999 GDP will contract much less sharply than in 1998, at 2.4% compared with14.8%. On the expenditure side this will reflect the fact that after the swingeingcutbacks in investment and consumption in 1998, the scope for further belt-tightening will be limited. However both domestic and foreign investors willcontinue to be extremely tentative about committing themselves to new pro-jects, with some exceptions such as agro-industry based outside Java. Therewill, however, be a slight upturn in export growth, as lower interest rates makethe plentiful trade finance that is now available more affordable, but a continu-ing liquidity squeeze will prevent a more robust recovery taking place andmanufacturing will continue to contract. The agricultural sector will grow quitestrongly in both 1999 and 2000, aided by the boost to export commoditiesprovided by the depreciation of the rupiah and by more stable conditions forthe rice economy. This will accelerate the process of redistributing wealth fromthe towns to rural areas and from the core islands of Java and Bali to the outerislands. However, although some of the projections of poverty levels over thenext year probably overstate the seriousness of the situation, the fact that manymore Indonesians will suffer impoverishment will further slow the recovery.

—even on optimisticassumptions for inflation

and the rupiah

Crucial to the recovery (and to minimising poverty) will be inflation. We areassuming that the price stabilisation that occurred in October-November 1998will be sustained, and that as a result inflation will slow markedly in 1999-2000.This assumption rests heavily on a strong agricultural recovery and the return offunctioning procurement and distribution systems. These are difficult issues,requiring, for example, the resolution of the current problems affecting fertiliserprovision and the largely ideological debate over who is to handle rice procure-ment and distribution. At the same time, large inflows of official capital to fundincreasingly large volumes of budget development spending will keep money-supply growth and thus inflationary pressure high. A stable rupiah will also becrucial to lowering inflation. As already noted, some of the factors that havecontributed to the strengthening of the rupiah will cease to be at work, partic-ularly from late 1999, but large official inflows of capital and the current-account surpluses expected over the next two years will help to stabilise thecurrency around present levels.

The current account willbe in unaccustomed

surplus

Neither external conditions nor the crippled state of the financial and prod-uctive sectors of the economy are conducive to an export-led recovery. Thelatest available trade statistics show that despite these unfavourable conditionsnon-oil and gas exports rose by nearly 6% in the first seven months of 1998. Inview of the weak prices for most export goods, this implies a stronger increase involume terms. The benefits of this growth were more than offset by a near 32%fall in oil and gas exports, reflecting sharp price falls. On the basis of this patternwe are forecasting falls in export earnings this year and next, and a very modestrecovery in 2000 as prices improve and volume growth picks up thereafter,thoughstill hampered by weak prices. Imports will follow a similar pattern,

Indonesia 9


accentuated by the sharp fall in domestic demand in 1998-99. The net effect ofthese developments will be large trade surpluses, peaking at $17.4bn in 1999.These surpluses will translate into unaccustomed current-account surpluses,even though there will be a general tendency for the invisibles deficit to con-tinue to rise. Lower trade turnover will moderate the rise in services debits, butthe services deficit will rise as a result of feeble earnings from tourism. The deficiton the income account will stabilise as repatriated profits and dividends fall as aresult of Indonesia’s economic downturn. Workers’ remittances will suffer fromthe wider regional downturn.

Economic results and forecasts(Rp bn; constant 1993 market prices; % change year on year in brackets unless otherwise

indicated)

1997a 1998b 1999c 2000c

Private consumption 273,593 232,554 223,252 222,136 (5.3) (–15.0) (–4.0) (–0.5)

Government consumption 31,740 29,201 28,763 28,763 (0.2) (–8.0) (–1.5) (0.0)

Gross fixed capital formation 134,034 100,526 96,504 96,022 (4.1) (–25.0) (–4.0) (–0.5)

Change in stocks 4,733 1,500 2,500 5,500 (0.2)d (–0.7)d (0.3)d (0.8)d

Exports of goods & services 119,445 120,639 123,064 127,002 (6.3) (1.0) (2.0) (3.2)

Imports of goods & services –129,858 –114,924 –113,545 –115,362 (6.6) (–11.5) (–1.2) (1.6)

GDP 433,685 369,495 360,538 364,061 (4.6) (–14.8) (–2.4) (1.0)

a Official data. b EIU estimates. c EIU forecasts. d As a percentage of GDP in the previous year.

40

50

60

70

80

90

100

110

120

1990 91 92 93 94 95 96 97 98 99 2000

Rupiah real exchange rates (c)1990=100

Rp:$Rp:$Rp:$Rp:$Rp:$Rp:$Rp:$Rp:$Rp:$Rp:$Rp:$Rp:$Rp:$Rp:$Rp:$Rp:$Rp:$Rp:$Rp:$

Rp:¥

Rp:$

Rp:¥Rp:¥

Rp:DMRp:DMRp:DM

Rp:$

Rp:¥

Rp:$

Rp:¥Rp:¥

Rp:DMRp:DMRp:DM

97 98(a) 99(b) 2000(b)

Rp:$

Rp:¥

Rp:$

Rp:¥

Rp:$

Rp:¥

Rp:$

Rp:¥

Rp:$

Rp:¥

Rp:$

Rp:¥

Rp:$

Rp:¥

Rp:$

Rp:¥

Rp:$

Rp:¥

Rp:$

Rp:¥

Rp:DM

97 98(a) 99(b) 2000(b)97 98(a) 99(b) 2000(b)97 98(a) 99(b) 2000(b)97 98(a) 99(b) 2000(b)97 98(a) 99(b) 2000(b)

-15

-10

-5

0

5

10

1996 97(a) 98(a) 99(b) 2000(b)

Indonesia

Asia excl Japan

Gross domestic product% change, year on year

(a) EIU and official estimates. (b) EIU forecasts. (c) Nominal exchange rates adjusted for changes in relative consumer prices.Sources: EIU; IMF, International Financial Statistics; World EconomicOutlook.

10 Indonesia


Review

The political scene

Mr Habibie has beenlosing ground—

Over the past three months the president, B J Habibie, has been losing ground.His attempt to recast himself as a reformer (3rd quarter 1998, pages 10-12) hasbeen failing. His standing in the opinion polls, never high, has been slipping.In an opinion poll in late November, conducted by the weekly magazine Tempo(recently back on the news-stands after a four-and-a-half-year ban), only 7% ofrespondents said that he was their preferred presidential candidate. His closestally is probably General Wiranto, the armed forces commander and defenceminister, but he, like Mr Habibie, is now on the defensive. The president alsodraws support from some of the more sectarian (and quite narrowly based)Muslim organisations, but if he tries to milk that support, as he appears to havedone during the special session of the People’s Consultative Assembly (MagelisPermuswayaratan Rakyat, MPR) in November, it risks running out of control.Most of his support is conditional. A close adviser admitted recently that, if hetries to run for the presidency next year, Mr Habibie may face a challenge fromwithin Golkar, nominally his political vehicle.

—as his reformist agenda— In his Independence Day speech, on August 16th, Mr Habibie set out a thor-oughly reformist agenda.

• He said that the old paradigm (of Suharto’s New Order) was no longeradequate to respond to the demands and aspirations of the people;

• offered a bottom-up approach and an adjustment of the socio-political roleof the armed forces (Angkatan Bersenjata Republik Indonesia, ABRI);

• apologised for human rights violations committed by “individuals from thestate apparatus”;

• promised investigations into the origins of the May riots and the possiblyorganised looting and rapes that accompanied them;

• pledged to build a just society in which human rights and the rule of lawwould prevail; and

• set four economic priorities: cleaning up the banking sector, resolving theprivate debt problem, eliminating monopolies and promoting transparency inpolicymaking.

—fails to appease theopposition—

Three months later Mr Habibie looked too reliant on the old paradigm to carrythrough the political part of this agenda. Despite some glimmers of light, eco-nomic recovery was a distant prospect (see The economy). Most ominously, inmid-November the capital, Jakarta, endured two consecutive weekends of streetviolence. The first was linked to a special session of the MPR, held on November10th-13th to set the electoral timetable. The second involved Muslim attacks onChristians and their churches, sparked off by a row over gambling. These eventswere not comparable to the May riots in the death and devastation they caused(14 died during the MPR session, most when security forces opened fire on

Indonesia 11


student demonstrators near Atma Jaya University, not far from the MPR build-ing; another 13 died during the religious riots of November 20th).

However, on both occasions sectarian feelings were again stirred, not just be-tween religions but also between different strands of the religion of the majorityof Indonesians, Islam. In both instances the ethnic Chinese community, includ-ing their businesses, were targeted again. The riots also added to this year’sgrowing list of incidents—the kidnapping of activists, the shooting of studentsat Trisakti University, the Jakarta riots, and the killings and revenge killings thatspread out from Banyuwangi in East Java from August (see below)—which havedamaged the reputation of the armed forces. They also have set the scene forfurther confrontations. The student movement, which until a week before theMPR session had been dismissed by conventional political wisdom as too di-vided to have any hope of success, has been galvanised. The students havevowed to press on with their demonstrations until their demands are met.Almost every day since November 13th (when the security forces opened fireindiscriminately on demonstrating students) there have been student protestsin Jakarta and many other towns throughout the country.

—or halt the mountingviolence

Violence has become endemic. It is often difficult to disentangle the motivesbehind it—political, religious, ethnic, criminal, tribal or economic. A demon-stration, by transport workers demanding lower prices for food and spare partsin Medan in mid-September, which turned violent was widely believed to havebeen manipulated by the security forces. It is still not known what underlay themurky series of killings, which began with murders of supposed tukang santet(black magicians) by masked killers dressed in black (known as ninja) in villagesaround Banyuwangi in East Java in August and spread from there to many partsof Indonesia. Most of the victims in Banyuwangi were members of Muslimorganisations, most commonly of Nahdlatul Ulama (NU), which is strong inEast Java. By mid-October the local religious affairs office had registered 114victims in Banyuwangi district alone. Counter-killings of suspected ninja werestill occurring in late November.

Abdurrahman Wahid of NU pointed the finger at an unnamed cabinet ministerwho wanted to set the two largest Muslim social organisations, NU andMuhammadiyah, against each other. The armed forces commander, GeneralWiranto, blamed the killings on “a conflict between the political elite”. Simi-larities in modus operandi, the dress of the perpetrators and the passivity of thesecurity forces, suggested to some opposition politicians that the killings wereorganised by the armed forces or by rogue elements within them. The policesuspected revenge by children of alleged communists killed in the wake of the1965 coup.

Moderate oppositionfigures unite—

Impending violence at the MPR session briefly united the liberal-nationalistopposition, whose parties still look most likely to dominate the political land-scape that finally emerges from the present chaos (3rd quarter 1998, pages 6-7).On the eve of the MPR session four political leaders—Megawati Sukarnoputri ofPDI Perjuangan, Abdurrahman Wahid of NU, Amien Rais of Partai AmanatNasional (PAN) and the sultan of Yogyakarta, Hamengkubuwono X—met atMr Abdurrahman’s house in Ciganjur in Jakarta and issued a joint declaration.

12 Indonesia


Megawati and Mr Abdurrahman are close political allies, but despite variousattempts to bring them together they had hitherto avoided formal contact withAmien Rais.

The Ciganjur declaration was much more moderate than the reforms de-manded by the students. The students wanted an immediate end to the armedforces’ political role; for Suharto, the former president, to be put on trial; andfor Mr Habibie to be replaced by an interim presidium of respected figures. TheCiganjur group proposed bringing the presidential election forward; a properinvestigation of Suharto’s wealth; and the phasing out of armed forces’ duelcivilian and military role (dwifungsi) over a period of six years.

—but only briefly In the wake of the disastrous MPR session, however, Amien Rais took a harderline. He gave Mr Habibie one month to get to work on the decrees passed bythe MPR in its special session, with particular emphasis on the one requiring aninvestigation into Suharto’s wealth. He joined the chorus calling for GeneralWiranto to step down. He has proposed that Mr Habibie declare his govern-ment a transitional one, thereby removing himself as a presidential contenderopen to accusations of self-interested politicking.

Mr Habibie cracks thewhip—

After the violence that accompanied the MPR session, Mr Habibie sought torecoup his position through a combination of concessions and threats. Ratherthan blaming the students, he accused the Barisan Nasional (BN) of instigatingthe riots. BN is a group formed in the wake of the victory of pro-Habibie forcesat the Golkar congress in July (3rd quarter 1998, page 16), comprising retiredmilitary men, former Golkar officials and Javanese nationalists.

What most worries Mr Habibie about BN, however, is probably the involve-ment of allies of the retired armed forces’ commander, General Murdani, along-time Habibie adversary. On November 12th as the MPR was meeting, 18members of the BN issued a communiqué which echoed several of the studentdemands, including that Mr Habibie step down and be replaced by a presid-ium. The signatories to the communiqué were briefly held for questioning andbanned from travelling abroad.

—and offers someconcessions

In a significant concession to the Ciganjur group and Mr Amien in particular,Mr Habibie agreed to accelerate next year’s election timetable. Parliamentaryelections are still to held in mid-year (on June 7th), but the MPR will now meeton August 29th to elect a president. Meanwhile the parliament (DewanPerwakilan Rakyat, DPR) is proposing changes to the draft political laws that itis now considering, including legislation on the electoral system (it favoursretaining the existing proportional system) and on the number of armed forcesseats—see box: Main points of the draft political laws. These changes may allayfears that the laws are being drawn up to keep the pillars of the new govern-ment—Mr Habibie, Golkar and the armed forces—in power. Government at-tempts to pack the MPR with its supporters would anyway only undermine thelegitimacy of the final stage in the transition that is supposed to set the seal onthe whole process.

Indonesia 13


Parties areproliferating—and

coalescing

By late November 106 parties were in existence. This almost certainly does notpresage the extreme political fragmentation feared by some commentators.Only a few of these parties are expected to attract much support. Although nosingle party will win a majority, several have a solid infrastructure and leaderswith a large following. Moreover one major coalition—uniting Megawati’s PDIPerjuangan and the NU offshoot, the National Awakening Party (PartaiKebangkitan Bangsa, PKB)—is already in existence. The Muslim vote is likely tobe scattered among a large number of parties, although four—the PKB, AmienRais’s PAN, the Moon and Star Party (Partai Bulan Bintang, PBB) and the onlyMuslim party Suharto allowed to exist, the United Development Party (PartaiPersatuan Pembangunan, PPP)—will pick up most of it.

PDI Perjuangan holds acongress—

The party currently favoured to win the most votes in next year’s generalelection, PDI Perjuangan, held a congress in Bali on October 8th-10th. PDIMegawati is the faction of the Partai Demokrasi Indonesia (PDI) led byMegawati Sukarnoputri, who was ousted as the party’s chairman in a govern-ment-engineered coup in June 1996. The congress, aptly described by oneobserver as a “grand political spectacle”, marked Megawati’s return to the

Main points of the draft political laws

The law on electionsLocal government elections will not be held at the same timeas the DPR election.

An electoral commission is to be formed, consisting ofrepresentatives of the government, the parties and thepublic. It will be responsible to the president.

To qualify for participation in elections, parties must havebranches in more than half of the 27 provinces and in morethan half of the districts of those provinces, or have thesupport of at least 1% of voters.

Limits are placed on campaign contributions. Individualcontributions exceeding Rp100,000 ($13) must be declared.

There are various restrictions on campaigning, including aban on questioning the state ideology, Pancasila, and onreligious, ethnic or racial insults.

Parties that win less than 10% of the total number of seatsmay not take part in the next election, unless they join forceswith other parties.

The law on political partiesParties must be based on Pancasila, not endanger the unityof the country, have at least 50 founding members and be

registered at the Department of Justice.

Civil servants and members of the armed forces may not bemembers or officers of a party.

Parties may not engage in business or receive funding fromabroad or from state-owned enterprises. They will receivefunds from the government in proportion to their share ofthe vote. Contributions from business or individuals will besubject to the restrictions set out in the law on elections.

The law on the composition of the MPR, DPR andprovincial assembliesThe People’s Consultative Assembly (MPR) will consist of 700members, comprising the 550 members of the DPR, 81regional representatives and 69 group representatives.

Membership of the DPR (the national parliament) willincrease from 500 to 550. Of these 495 members will beelected, 427 on a district basis and 68 by proportionalrepresentation. The number of appointed members from thearmed forces will be cut from 75 to 55.

90% of the membership of the provincial assemblies will beelected on a district basis, the other 10% being members ofthe armed forces.

Members of the legislative bodies may not hold state offices.

14 Indonesia


political mainstream. She took the opportunity to confirm her intention tostand for the presidency next year.

—which leavesunanswered questions

Doubts about her and her party remain, however. Megawati is commonlydescribed as indecisive, uncharismatic and apolitical, and many see her as atbest a symbolic figure who owes her success to her father, Indonesia’s firstpresident, Sukarno. Policy gaps abound, and it is difficult to judge just how“Sukarnoist” the party is.

Two major policy planks—its opposition to federalism and its support for thecontinuation of dwifungsi—sound worryingly Sukarnoist to some. On economicpolicy, an area where Sukarno failed badly, its two main policy formulators,Kwik Kian Gie and Laksamana Sukardi, are respected economists with extensivebusiness experience. The congress showed how broad the PDI’s base hasbecome. Alliances with the PKB and the various groups that lost out whenpro-Habibie forces took control of Golkar in July were cemented at the congressby appointments to the party executive of K H Wahid Hashim, a youngerbrother of Abdurrahman Wahid, retired Major-General Theo Syafei andMeilono Suwondo, a younger brother of a former Golkar civilian stalwart,Siswono Yudohusodo. The party now enjoys the support of several of the retiredmilitary men who form the backbone of the Barisan Nasional. This broad, quiteconservative coalition is probably not conducive to policy coherence.

The government offerslittle reassurance to the

Chinese

Government attempts to reassure the ethnic Chinese community, many ofwhom have left the country in the past year to escape the violence directed atthem, have been fitful. Official scepticism about the alleged rapes that tookplace during the May riots has not helped, nor did some early statements fromthe president on the issue (3rd quarter 1998, page 19). One of the few positiveresponses—a presidential decree on September 16th aimed at ending state-sanctioned racial discrimination—was barely noticed. News of it first appearedin the Singapore Straits Times one month after it was issued, and only then wasit taken up in the Indonesian press. The only other formal step taken in thisdirection since Mr Habibie became president was a decision of the home affairsministry to stop using special codes for Chinese on identity cards.

The New Order lives on Like other countries coming out of a long period of authoritarian government,Indonesia is engaged in a highly political debate on how to deal with its past. InIndonesia’s case there has been no clean break with the Suharto regime. Thenew president was Suharto’s vice-president. Nineteen members of the cabinetwere in Suharto’s last cabinet. Two pillars of Suharto’s New Order, the armedforces and Golkar, continue to play important roles. There has been pressure onboth to apologise for past actions. (Only the armed forces have done so.) SomeSuharto loyalists have been removed from the MPR and the DPR, but bothhouses are still dominated by Golkar members and appointees of the govern-ment and armed forces. Suharto himself still lives in his private house in centralJakarta, and occasionally issues public statements. The past is now freely de-bated in the media, including the previously unmentionable topic of Suharto’srole in the murky events surrounding the 1965 coup which led to his coming topower. But there is little agreement on what should be done about it.

Indonesia 15


Pressure mounts for theSuharto wealth to be

investigated—

Pressure has been mounting for an investigation into Suharto’s wealth.President Habibie and General Wiranto have been reluctant to pursue theformer president. General Wiranto publicly pledged to protect Suharto afterthe latter stepped down on May 21st. In September Mr Habibie appealed topeople to stop slandering Suharto and “respect their elders”. In an interview onSeptember 6th on a television station partly owned by family members,Suharto himself denied that he had amassed billions of dollars through corruptbusiness dealings or that he had “a single cent” in a foreign bank account. Theattorney-general, Major-General Andi Mohammad Ghalib, said that, as a for-mer president, Suharto was to be believed. General Ghalib was then asked to setup a team to investigate the former president. The attorney-general’s investig-ating team reported in mid-November that it had uncovered Rp21bn (about$2.8m) in bank accounts in Suharto’s name around the country. It has alsoaudited the charitable foundations, which are suspected of having been vehi-cles for the exaction and siphoning of money during the New Order.

In the wake of a resolution passed at the November MPR session specificallycalling for Suharto to be investigated, there was a flurry of activity. In a letterdated November 22nd Suharto told Mr Habibie that he was handing over con-trol of seven foundations with combined assets totalling more than Rp4trn($350m) to the government. On November 28th Suharto issued a statementthrough his lawyer warning that, if he was brought to trial, the result could be amessy process involving incumbent and former officials which might dragdown the government. Mr Habibie’s response to the MPR resolution and toAmien Rais’s ultimatum was to try to set up an independent investigating body,but he had to abandon this plan after failing to find anyone willing to sit on it.

—but the empires arealready unravelling—

The investigating team’s accomplishments have been overshadowed by a hostof developments that have put the Suharto family’s wealth under the spotlight.

According to the Ministry of Transport, the government has cancelled 39 trans-portation projects worth a total of Rp6.14trn, which had been contracted outto Suharto family members and their associates. The government plans torenegotiate 26 joint-operation projects. The Ministry of Mines and Energy hasidentified 159 companies, linked to former president Suharto and seniorgovernment officials, with contracts with the state oil company Pertamina.Pertamina has terminated some of the contracts and has revised the terms ofothers. As a result, this year it expects to save about $65m in foreign-currency-denominated contracts and Rp313bn in rupiah-denominated contracts.

The National Land Board, which is also investigating the wealth of Suharto andhis family, has found land and other assets. Thousands of hectares of land inIrian Jaya, Sumatra, West Nusatenggara (the province that includes Bali), Jambiand East Timor have been found to be registered in the names of Suhartofamily members. Violations of the land reform laws may be involved. The mostpublicised of these land cases concerns the Tapos ranch near Bogor in WestJava, which Suharto developed in the 1970s on 750 hectares of land, allegedlyafter evicting farmers who had cultivated it for generations. Among the otherholdings uncovered is 2.4m ha of rain forest in Kalimantan (Borneo).

16 Indonesia


Further pressure on the family assets will come once the clean-up of the statebanks gets under way (see Finance and banking). Bank officials have allegedthat Suharto family members pressured state bank directors to give them loanson favourable terms and then to be lenient when the loans went bad. Severalof Suharto’s children have now been called in for questioning. Suharto’s eldestson, Sigit, was questioned by the prosecutor’s office in North Sumatra inSeptember about a Rp244bn loan given without collateral by the local develop-ment bank for a luxury housing project.

—including TommySuharto’s

The empires of several of the Suharto children have also been unravelling.Suharto’s most controversial son, Hutomo (Tommy) Mandala Putra, and hisbusiness empire, Humpuss, have suffered a series of blows. In October thegovernment decided to penalise the Timor national car project, which PresidentSuharto entrusted to Tommy Suharto in 1996, for not meeting countertrade andlocal content requirements before its special facilities were cancelled in January1998 as part of the third agreement with the IMF. As a result the company,Timor Putra Nasional, will be liable for $1.3bn of luxury sales tax and importduties from which it had been exempted.

Humpuss’s airline, Sempati, has ceased operations. Tommy Suharto has soldhis shares in Lamborghini, the Italian luxury car manufacturer that he tookover. The IMF also insisted on the dismantling of his cloves trading monopoly.In early November the Ministry for Forestry asked Tommy Suharto to returnfive helicopters leased to his company, Gatari Air, in 1990 under a five-yearcontract which had never been renewed. The national airline, Garuda, hascancelled a contract to buy A-330-300 engines from Rolls Royce for whichTommy Suharto had been the agent. On November 23rd-25th Tommy Suhartowas questioned at the Attorney-General’s Office in connection with the pur-chase of land from the state procurement and distribution agency, BULOG, forGoro, a retail co-operative which he had set up. At the same time the Attorney-General’s Office requested that he be banned from travelling abroad.

Where might theinvestigations end?

It is popularly held that high officials have been obstructing a full investigationinto Suharto’s wealth out of fear that it will eventually lead to demands for ageneral investigation into “corruption, collusion, nepotism” (korupsi, kolusi,nepotisme, commonly called KKN). The dangers were highlighted when someother New Order corruption allegations burst into the open at the end ofSeptember. The Asian Wall Street Journal published a lengthy article on theevents surrounding the renewal in 1991 of the mining contract in Irian Jayawith the New Orleans-based company Freeport McMoRan. The new contractpermitted Freeport to develop the giant Grasberg copper and gold mine. Thearticle alleged that friends and relatives of the then minister of mines andenergy (and current co-ordinating minister for economics, finance and ind-ustry), Ginanjar Kartasasmita, had benefited from the negotiations.

The prime beneficiary is alleged to have been Aburizal Bakrie, a friend ofMr Ginanjar’s, who heads the Bakrie & Brothers conglomerate and is also chair-man of the Chamber of Commerce and Industry (Kamar Dagang dan Industri,KADIN). To meet the divestment requirement agreed under the new contract,Mr Bakrie is alleged to have been nominated by Mr Ginanjar to buy a 10%

Indonesia 17


stake in Freeport. The $212.5m purchase is alleged to have been made withborrowed funds partially guaranteed by Freeport, and to have netted Mr Bakriea large profit.

The allegations were first aired by an independent Indonesian economist, RizalRamli, in early 1997. Although they are not new, they aroused great interestbecause for the first time they were widely publicised in the country’s newlyfree press and abroad by a US academic, Jeffrey Winters, who was brieflybanned from entering Indonesia. The press also took the story further. It re-vealed that in 1994 Freeport’s obligation to divest up to 51% of its shares to theIndonesian government or local companies within 20 years of its contractbeing signed (by 2011) had been waived. Freeport and mines and energy min-istry officials insisted that the waiver was legitimately given under a 1994government regulation, which allowed wholly-owned foreign companies tooperate in Indonesia and loosened divestment requirements.

Economic policy

Falling interest rates— By early November Indonesia seemed to have entered a virtuous circle in whichlower inflation, a stronger rupiah and falling interest rates were mutually rein-forcing. Between early September and late October the rupiah gained nearly40% against the dollar and stabilised thereafter. Interest rates on one-monthBank Indonesia Certificates (Sertifikat Bank Indonesia, SBIs) fell in earlySeptember, and other rates have followed suit. By the end of November themaximum deposit rate guaranteed by Bank Indonesia on one-month rupiahdeposits had fallen to 49%, from 65% in early September.

Maximum guaranteed interest rates, 1998a

(%)

Sep 7th-13th Nov 30th-Dec 6th Rupiah Dollar Rupiah Dollar

deposits deposits deposits deposits

1 month 65 15 49 15

3 months 58 14 47 14

6 months 47 14 38 14

12 months 46 14 36 14

24 months 28 18 25 17

Interbank 64 12 45 11

a As prescribed under the central bank regulation on guaranteeing third-party deposits and inter-bank money market funds, issued on May 29th 1998.

Source: Bank Indonesia.

—are underpinned bycapital inflows and lower

inflation—

Crucial to these developments were large inflows of official capital from theIMF and other sources (see Foreign trade and payments) and success in gettingfood prices under control (see Sectoral trends). There have also been signs thatmoney supply growth is coming under control, as two of the main sources ofmonetary expansion—Bank Indonesia liquidity assistance to the banks andliquidity credits to support the subsidies programme—both stabilised. As ofNovember 23rd net domestic assets, the monetary magnitude targeted under

45

50

55

60

65

70

75

.Aug . . . Sep . . . . Oct . . .Nov. . . Dec

One-month SBI auction interest rates, 1998 (a)%

(a) Weekly data beginning 29th July. Source: Bank Indonesia.

18 Indonesia


the IMF agreements, stood at –Rp69.33trn, well below the adjusted target of–Rp39.56trn.

—encouraging hopes ofrecovery

In the latest of its monthly letters of intent to the IMF the Indonesian govern-ment said that it would soon be moving from stabilisation to sustainablegrowth. The stabilisation is still fragile, however, vulnerable to budget pumppriming, more food problems, heavy bank recapitalisation costs, or suddenshifts in sentiment set off by political events or an interest rate cut. The nextthree economic challenges for Mr Habibie’s government, required to get a re-covery under way, are to create a functioning banking system; resolve theprivate corporate debt crisis; and crank up its spending to budgeted levels.

The budget goes intounexpected surplus—

The final budget for the 1998/99 fiscal year (April-March), which was notfinally approved until late July—almost four months into the fiscal year (3rdquarter 1998, pages 23-24)—envisaged a deficit equivalent to 8.5% of GDP. Bythe end of the first half of the year (end-September) the budget was on track torecord a surplus equivalent to 2% of GDP. This unexpected outcome was theresult mainly of lower than scheduled expenditure (just 30% of the full-yearallocation). In the first half, the rupiah averaged Rp11,660:$1, well above theRp10,000:$1 assumed in the budget. This contributed to higher than expectedrevenues from export taxes (at Rp2.3trn, 244% of the projected full-year take) andhelped boost the rupiah value of oil and gas revenues (though not by enough tooffset the lower than budgeted oil price). Domestic revenues were also surprisinglystrong. This was only partly because inflation was higher than the 66% averagerate assumed in the budget. Income tax receipts, for example, reached 97% oftheir full-year target, reportedly because of the large amount of tax due onredundancy payments.

Budget summary(% of GDP)

1997/98a 1998/99b

Revenue 16.2 15.7 Oil & gas 4.6 5.2 Non-oil 11.6 8.9 Privatisation 0.0 1.6

Current expenditure 10.6 17.0 Subsidies 3.1 6.2 Interest 1.7 3.3 Other 5.8 7.5

Public savingsc 5.6 –1.3

Development expenditure 6.6d 7.2 Social sectors 1.0 1.6 Special employment schemes 0.0 0.9 Other 4.6 4.7

Deficit 1.0 8.5

FinancingExternal finance 1.6 4.8 Domestic finance –0.6 0.0 Exceptional finance 0.0 3.7

a Actual. b Revised. c Revenue minus current expenditure. d Components do not sum in source.

Source: World Bank, Indonesia in Crisis: A Macroeconomic Update.

Indonesia 19


—leaving a lot of spendingfor the second half

At the same time, expenditure was lagging. In the final budget, subsidies wereexpected to double (from 3.1% of GDP in 1997/98 to 6.2% in 1998/99) on theassumption that there would be no further increases in the administered pricesof fuel, rice, soybeans, wheat flour, sugar and fishmeal. In fact rapid inflation,the strengthening rupiah and the deregulation of imports cut back the sub-sidies bill (see also Sectoral trends). Meanwhile on the development side of thebudget, spending on health and education and employment schemes, whichhad been budgeted to replace cancelled water, transport and energy infrastruc-ture projects, has not been reaching its target, reportedly because of the diffi-culty of locating those in need. A freeze on civil service pay has probablyintensified the problem by encouraging moonlighting and reducing efficiency.In the second half of the year despite a stronger rupiah (which will cut into oiland gas revenues), the rupiah value of foreign aid disbursements is expected topick up to meet the need for higher development spending. In its Novemberletter of intent to the IMF, the government revised down its forecast budgetdeficit, but only to 6% of GDP, on the assumption that spending will revive.

Privatisation receipts lag— By the time of the government’s September letter of intent, it was alreadyevident that the target of raising $1.5bn from privatisations would not be met.By then two unlisted state-owned enterprises were supposed to have beencompletely divested and additional shares sold in at least two others, the dom-estic and international concerns, Telkom and Indosat. In fact only one sale hadbeen completed. This was the $115m sale of a 14% stake in Semen Gresik to theMexican cement maker, Cemex. The government had originally offered Cemexa 35% stake in the company, but protests from company employees had per-suaded it to scale the offer down. The announcement in June by the ministerfor state enterprise rehabilitation, Tanri Abeng, that a memorandum of under-standing was about to be signed with Ispat International, a Dutch-based steel-maker, for the purchase of 49% of Krakatau Steel raised charges of “newcronyism”. The management of Krakatau Steel had not been consulted and nobids invited. In the end the minister backed down and said that the privatis-ation of Krakatau would be postponed until 2000. In the meantime the com-pany intends to restructure by selling off its port, property and industrial estatesubsidiaries.

—and sights are lowered— In the November letter of intent to the IMF, the government lowered its sightsfurther. It is now envisaged that equity in only four more enterprises will bedivested by the end of the current fiscal year, and a majority stake will be soldin only one of these, Pelindo II, which runs the Jakarta container port. How-ever, according to the master plan agreed between the government and the IMFand published in early November, all but a handful of the existing 156 stateenterprises will be privatised over the next decade. In the period 1999-2001 theprivatisation programme will focus on hotels and trading, construction, min-ing, engineering and fertiliser companies. During the same period the stateelectricity company (PLN) and Garuda are to be restructured preliminary toprivatisation.

—to reflect reality The delay reflects the general unattractiveness of all state enterprises in thecurrent climate, even ones previously regarded as desirable. The stockmarket

20 Indonesia


capitalisation of Indosat, for example, has fallen from $3.4bn before the crisis,to around $700m now. Other avenues for privatisation, such as convertiblebond issues, are likely to find favour with investors where companies havegood long-term prospects. But many state enterprises, such as the state plant-ations which are due to be sold over the next year, badly need fresh investmentif they are going to maintain profitability over the long term.

“Old” wealth comes underattack—

Several of the top conglomerates that came to dominate the economy duringthe Suharto years are now under threat. These highly leveraged mammoths wereheavily exposed, first by the collapse of the rupiah and then by the economicdownturn. Two influential lobbies are eager to hasten their demise. The first arethe “new cronies”, which like the old ones, are profiting from access to power.The second group are the economic nationalists in the new government, ofwhom the most prominent is Adi Sasono, the minister of co-operatives. Thisgroup sees the discomfiture of the largely ethnic Chinese conglomerates asproviding an opportunity to redress the ethnic and economic balance by creat-ing opportunities for small and medium-scale pribumi (indigenous) businesses.Both groups were thought to have been behind the government’s attempt to setimpossibly tough conditions on conglomerate banks with large outstandingobligations to Bank Indonesia (see Finance and banking).

Support for using the Indonesian Bank Restructuring Authority (IBRA) to chan-nel assets from ethnic Chinese business to indigenous business has come fromHariyadi Sukamdani, chairman of the Indonesian Association of YoungBusinessmen, and Aburizal Bakrie, the chairman of KADIN and of Bakrie &Brothers. The Ministry of Co-operatives’ director-general, DeswandhyAgusman, has said that he would like to see at least 20% of IBRA’s assetstransferred to the ministry.

The ministry has also been trying to gain control of rice and cooking oildistribution, in which the conglomerates have been heavily involved (see Sec-toral trends). The minister of forestry and plantations has said that privateforestry and plantation companies must allocate 20% stakes to co-operatives.This strain in government thinking on the economy was enshrined in a decreepassed by the MPR in November, which envisages avoiding the concentrationof wealth by encouraging the development of small and medium-scale enter-prises and co-operatives (see The political scene).

—but some will survive There are several reasons to doubt the viability of this strategy. Several of thenew cronies are not so new: the three most cited ones—Bakrie & Brothers, theLippo Group and the Sinar Mas Group—were all in the top ten in terms ofconglomerates’ turnover before the change of government (see table). Second,as the near-collapse of rice and cooking oil distribution in August-Septembershowed, replacing the conglomerates is not as easy as it sounds. Their crucialimportance to the economy is also indicated in the table below: at their peak in1996 the turnover of the top 20 conglomerates was equivalent to 22% of GDP,while the top 250 accounted for 42% of GDP.

Indonesia 21


Turnover of the top 20 conglomerates(Rp bn)

1996 1997

Salim (Liem Sioe Liong) 32,560 27,516

Sinar Mas (Eka Tjipta Widjaya) 15,960 13,390

Astra International (Nusamba and public) 8,815 6,700

Lippo (Mochtar Riady) 6,360 4,900

Dharmala (Soehargo Gondokusumo) 5,870 4,620

Gudang Garam (Rachman Halim) 4,595 4,135

Bakrie & Brothers (Aburizal Bakrie) 3,275 4,080

Gemala (Sofyan Wanandi) 5,520 4,072

Barito Pacific (Prayogo Pangestu) 3,860 3,450

Texmaco (Marimutu Sinivasan) 2,500 3,000

Arya Upaya (Kaharudin Ongko) 2,780 2,085

Rodamas (Tan Siong Kie) 3,450 2,590

Krama Yudha (Syarnubi Said) 2,755 2,665

Djarum (Robert Budi Hartono) 2,910 2,616

Bimantara (Bambang Trihatomodjo) 3,265 2,450

Gajah Tunggal (Sjamsul Nursalim) 2,540 2,220

Pembangunan Jaya (Ciputra and the Jakarta local administration) 2,900 2,175

Ciputra (Ciputra) 2,360 1,920

Humpuss (Hutomo Mandala Putra) 2,310 1,845

Raja Garuda Mas (Sukanto Tanoto) 2,050 1,845

Total 116,635 98,274Source: Data Consult, Indonesian Commercial Newsletter.

The bankruptcy law getsoff to a shaky start—

The new bankruptcy law came into force in August when the first in a series ofnew commercial courts was set up in Jakarta. The court has, however, been adisappointment to those who had hoped that it would hasten corporate re-structuring and the settlement of domestic and foreign corporate debt. Only 17cases had been filed with the court by late November. Just two companies hadbeen declared bankrupt, and three suits had been rejected by the court. One ofthe companies declared bankrupt was a property developer, Modernland,which was being sued by a couple who had lost their Rp94m ($12,000) depositon a house. Two of Modernland’s creditors, Bank Internasional Indonesia andBank Danamon, filed an appeal against the ruling on the grounds that it didnot take into account other creditors and was not related to a loan contract.One of the suits rejected by the court involved a well-known conglomerate,Ometraco, with interests in banking (it owns 51% of the troubled Bank Tiara—see Finance and banking), animal feed and infrastructure. The case had beenseen as a landmark because the suit had been brought by a diverse group ofcreditors, comprising 13 foreign and Indonesian banks, which claimed thatthey were owed more than $100m by Ometraco and its finance subsidiary,Ometraco Multi Artha. The judge dismissed the case because in his view separ-ate suits should have been brought against the two companies. On November25th the Supreme Court rejected an appeal brought by the plaintiffs, sayingthat they had failed to prove that a majority of creditors had called a default, asrequired in the syndicated loan agreement.

22 Indonesia


—for legal reasons— These idiosyncratic judgments reflect just one of the problems with the newsystem—a shortage of personnel qualified to administer it. Other criticismsfocus on the law itself—its omission of such concepts as those of discovery(where failure to disclose information can be construed as contempt of court)as well as its harshness (by not incorporating Chapter 11 protection and requir-ing that cases be decided in 30 days).

—and economic ones Perhaps the greatest deterrent to resort to the commercial court is that in thecurrent economic conditions no one stands to benefit: the debtor loses hisassets but the creditor gets nowhere near the amount he is owed because of thesharp fall in the value of loan collateral (now one-fifteenth of its pre-crisis level,according to the KADIN chairman, Aburizal Bakrie). Disagreements over valu-ation and the exchange rate to be applied are also hampering debt-equityswaps. The lack of alternatives seems to have strengthened the expectationamong debtor companies that some of their debt will be forgiven.

The complex private debtissue—

Resolving private corporate debt has implications across a range of issues, fromexchange-rate stability to employment. As of the end of March 1998, of Indo-nesia’s total private-sector external debt of $72.5bn, corporate external debtaccounted for $64.5bn compared with only $8bn owed by private banks (seetable). In addition, the corporate sector has more than Rp600trn ($80bn atRp7,500:$1) in debt to the domestic commercial banks. Total amortisationpayments due on the foreign debt in 1998 are put at $32bn (before restructur-ing), about 80% of which is private. Over two-thirds of the private debt isshort-term and the average maturity of all private debt is estimated to be only18 months. In its report Indonesia in Crisis: A Macroeconomic Update, the WorldBank notes that among East Asian countries Indonesia’s debt was least gearedto the banks and most to private corporations. Partly for that reason it judgedthat Indonesia’s private-sector debt problem was more complex than Mexico’swas in 1983, as well as being larger.

External debt, end-Mar 1998($ bn)

Public sector 65.56 Government 54.39 State enterprises 11.18 State banks 5.61 Corporations 5.57

Private sector 72.46 Private banks 8.00 Corporations 64.46

Total 138.02 of which: corporate debta 70.03 bank credit 64.60 domestic securities 5.43 bank debt 13.61 interbank lines 12.83 domestic securities 0.78

a Includes state enterprise debt.

Source: World Bank, Indonesia in Crisis: A Macroeconomic Update.

Indonesia 23


—has been deadlocked The chairman of INDRA, the body set up in June to pursue a Mexican-styleresolution to the private corporate debt problem (2nd quarter 1998, pages 36-37), announced in mid-September that not one of the roughly 2,000 Indonesianeligible firms had signed up for the scheme. The main problem seems to havebeen that at the then exchange rate (of around Rp12,000:$1) few companiescould meet their continuing obligation under the Frankfurt agreement to makeinterest payments. It is estimated that even at Rp6,000:$1 several large, heavilyindebted companies, such as Astra International, Semen Cibinong and Polys-indo Eka Perkasa, will still find it difficult to service their debts.

The Jakarta Initiative— On September 9th Radius Prawiro, chairman of the private-sector foreign debtrestructuring team, announced the launch of a new, more comprehensivescheme to tackle the issues of domestic and foreign corporate debt, called theJakarta Initiative. The programme seeks to establish the principles for out-of-court corporate restructuring and debt settlement, and sets out guidelines fordebt negotiations. A company’s creditors are recommended to form a solecommittee to negotiate debt restructuring. The committee and the debtor mayagree to a debt standstill. The debtor will then prepare a restructuring plan, onthe basis of which the committee can prepare an advisory report. The plan andthe report will form the basis for negotiations on a mutually agreed corporateand debt restructuring plan. A taskforce, to be managed by the Capital MarketsSupervisory Agency chairman, Jusuf Anwar, will have the power where appro-priate to recommend to the public prosecutor the transfer of negotiations to acourt-supervised process under the new bankruptcy law. The taskforce will alsoseek to eliminate regulatory or administrative obstacles to restructuring by, forexample, providing a one-stop service for the regulatory applications requiredfor restructuring. In addition, various incentives are to be offered to maketakeovers, mergers and rights issues easier.

—offers faint signs of hope The reaction of business to the Jakarta Initiative was lukewarm. A range ofearlier initiatives—ranging from the various schemes to provide trade financeto the INDRA plan—had flopped. At a conference on the Jakarta Initiative onNovember 2nd-3rd, attended by 1,200 people comprising local debtors andforeign creditors, a World Bank official warned against expecting much in theway of results before the first quarter of 1999. However, since September therehave been the beginnings of movement towards debt restructuring.

• In September Airbus Industrie agreed to reschedule $750m owed by Garuda.

• In October Astra International announced that it would be suspending debt-service payments temporarily pending agreement with its creditors on a re-structuring plan.

• In November Ciputra completed negotiations on restructuring Rp4,560bn($56.3m) in bonds, becoming the first Indonesian company to reach such adeal.

• On November 30th Semen Cibinong became the first Indonesian companyto resume paying part (25%) of the interest on its $1.2bn debt.

As of November 23rd, according to Radius Prawiro, the Jakarta Initiative Task-force had got 52 companies with Rp2.4trn of rupiah debt and $6.7bn of

24 Indonesia


foreign-exchange debt to begin negotiations on restructuring their debts.While the process of restructuring was going on, companies were not servicingtheir debts (a standstill was in operation).

Loans become softer— Indonesia’s economic plight at least allows it to receive aid on more conces-sionary terms. On August 25th the IMF’s Executive Board approved a SDR4.7bn($6.2bn) extended fund facility (EFF) for Indonesia to replace the three-yearstand-by credit approved on November 5th 1997. SDR3.7bn ($4.9bn) had al-ready been disbursed under the stand-by credit. The EFF will cover the remain-der of the period to November 2000, during which disbursements under thestand-by were to have taken place. Though the duration and amount of creditavailable under the EFF are the same as under the stand-by agreement, repay-ment under the EFF will be over a much longer period than under the originalagreement (4.5-10 years instead of 3.25-5 years).

In late November the government announced that Indonesia was once againeligible for assistance from the World Bank on International DevelopmentAuthority (IDA) terms. IDA loans are made available to countries with GDP perhead of less than $900. They have a 40-year repayment period, including tenyears’ grace, and are interest-free. At an average exchange rate of aroundRp10,000:$1, Indonesia will have a GDP per head of about $450 this year.

—and some arerescheduled

On September 22nd the co-ordinating minister for economics, finance andindustry, Mr Ginanjar, announced that the Paris Club had agreed to acceptdelayed payments of principal due before April 2000 on government andgovernment-guaranteed loans. Payments of $1.2bn on project loans were ex-tended over 20 years with a five-year grace period. Payments of $3.2bn inexport credits were extended over 11 years with a five-year grace period. Japan,which has been reluctant to reschedule, offered new loans equivalent to whatcomes due this fiscal year.

The economy

The economy has still notbottomed out

GDP contracted by 17.4% year on year in the third quarter after falling by12.2% in the first half of the year, according to data from the Central Bureau ofStatistics (Biro Pusat Statistik, BPS). The BPS is now forecasting that GDP willcontract by 13.7% in 1998, slightly worse than the 13.1% decline it had pre-dicted on the basis of its first-half data. This implies that it expects the year-on-year rate of contraction to slow slightly (to 14%) in the final quarter of the year,after accelerating in each of the three preceding quarters.

Before it revised its full-year GDP forecast downwards, the BPS had been assum-ing that agriculture would be the only sector to grow in 1998 and that the ratesof decline in a number of sectors, including manufacturing and construction,would slow. The third-quarter figures have undercut these assumptions. Pros-pects for the final quarter are uncertain (see Sectoral trends), but after falling inthe second and third quarters full-year agricultural output could contract too.In the third quarter neither construction nor manufacturing showed any signof bottoming out. In the light of the third-quarter figures, the earlier BPSforecast that manufacturing would contract by no more than 12% in 1998

Indonesia 25


would require the sector to return to growth (of 0.9%) in the fourth quarter.This will certainly not happen.

Gross domestic product growth by sector, 1998(% change, year on year; constant 1993 market prices)

1 Qtr 2 Qtr Jan-Jun 3 Qtr

Agriculture, livestock, forestry & fisheries 3.0 –2.4 0.3 –0.5

Mining & quarrying –6.9 –8.3 –7.6 –5.4

Manufacturing –7.1 –19.3 –13.3 –23.0

Electricity, gas & water supply 6.4 5.3 0.3 –2.3

Construction –30.8 –42.9 –36.8 –38.9

Trade, hotels & restaurants –12.7 –22.6 –17.5 –24.9

Transport & communications –0.7 –12.5 –6.5 –17.7

Financial, real estate & business services –9.0 –24.6 –16.9 –21.2

Other services –6.3 –4.0 –5.1 –5.2

GDP –7.9 –16.5 –12.2 –17.4

Non-oil & gas GDP –8.5 –17.8 –13.2 –18.7Source: Central Bureau of Statistics (Biro Pusat Statistik, BPS).

Gross domestic product growth: performance and forecast(% change, year on year; constant 1993 market prices)

1995a 1996b 1997c 1998d

Agriculture, livestock, forestry & fisheries 4.4 3.0 0.6 0.3

Mining & quarrying 6.7 5.8 1.6 –6.9

Manufacturing 10.9 11.6 6.2 –12.0

Electricity, gas & water supply 15.9 12.8 11.9 –2.2

Construction 12.9 12.8 6.4 –35.4

Trade, hotels & restaurants 7.9 8.0 5.5 –21.4

Transport & communications 8.5 8.7 8.4 –11.6

Financial, real estate & business services 11.0 9.0 4.8 –18.6

Other services 3.3 3.4 3.0 –5.2

GDP 8.2 8.0 4.6 –13.1

a Actual b Preliminary. c Very preliminary. d Forecast.

Source: BPS.

The impact of the crisishas been uneven—

The BPS also broke down its forecast for 1998 in various ways to show thedifferential impact that the crisis was having sectorally and geographically. Asshown in the table below, according to the BPS, in terms of GDP the crisis hashit the non-agricultural sector, the urban areas, the (traditionally economicallymore dynamic) western provinces, and larger-scale business harder than agricul-ture, the rural areas, East Indonesia and small business. This does not mean thatpoverty in the rural areas has increased less sharply than in urban Indonesia. BPSdata put the number of people below the poverty line in June 1998 at 79.1m,about 3.5 times higher than the 22.5m in poverty two years before. The numberof rural dwellers below the poverty line was estimated to have increased rathermore, by about 3.7 times, from 15.3m to 56.8m.

26 Indonesia


Official growth forecasts for 1998(constant 1993 market prices)

Rate of growth Share of GDP(%) (%)

SectorAgriculture 0.26 18.04Non-agriculture –15.38 81.96

Rural-urbanRural –7.74 26.16Urban –14.72 73.84

RegionWest Indonesia –13.89 82.16East Indonesia –6.21 17.84

Business groupSmall –11.21 38.99Medium-sized and large –14.19 61.01

Total –13.06 100.00Source: BPS.

—and its depth is disputed This apparently paradoxical finding could be explained by the fact that thenumber of people living close to the poverty line before the crisis was muchhigher in the countryside than in the towns. This is the view taken in a studyby the UN Development Programme and the International Labour Organis-ation. Based on the same data as those used by the BPS, it projected that 48%of the population will have fallen below the poverty line by the end of 1998and 66% by the end of 1999. These startling conclusions rest partly on theassumption that nominal incomes will not have risen between the onset of thecrisis and the end of next year. This assumption does not seem to be supportedby the BPS’s own findings on farmers’ terms of trade, and have been hotlycontested by the World Bank, which in its report for the aid consortium meet-ing in July, Indonesia in Crisis: A Macroeconomic Update, projected an increase inthe number of people falling below the poverty line to about 29m, 14.1% of thepopulation. A more recent World Bank study, reported in the press in lateNovember, found that employment was stable and that declining purchasingpower was limited mainly to the urban poor and middle class on Java.

Farmers’ terms of trade, Sep(1983=100)

%1997 1998 change

Java 108.9 105.7 –2.9 West Java 104.1 101.8 –2.2 Central Java 104.2 92.6 –11.1 Yogyakarta 114.5 127.1 11.0 East Java 112.7 101.3 –10.1

Sumatra 96.7 97.4 0.7 Aceh 95.2 87.9 –7.7 North Sumatra 85.9 81.1 –5.6 West Sumatra 121.5 115.6 –4.9 South Sumatra 105.1 130.1 23.8 Lampung 76.0 72.5 –4.6

continued

Indonesia 27


%1997 1998 change

Other regions 113.8 119.1 4.7 Bali 119.9 128.8 7.4 West Nusatenggara 124.5 138.0 10.8 South Kalimantan 106.5 105.0 –1.4 North Sulawesi 101.7 100.4 –1.3 South Sulawesi 115.8 122.3 5.6

All Indonesia 106.4 107.4 0.9Source: BPS.

Falling food prices bringinflation down

Month-on-month consumer price inflation has been declining after reaching8.6% in July (see table). In October prices actually fell for the first time sinceJune 1997. The key to the stabilisation of the monthly rates has been foodprices which, after increasing more rapidly than the general index in everymonth between January and September except May, fell in October andNovember. Underlying these falls were declining prices for the two importantstaples, rice and cooking oil, which had been facing a host of production anddistribution problems (see Sectoral trends).

It now looks possible that by the end of 1998 the year-on-year rate will havefallen below the 80% predicted by the government and the IMF. Assuming thatthe month-on-month rate is again close to zero in December, the year-on-yearrate will fall to just above 75% in that month. Since in the first 11 months theaverage increase in the consumer price index was 51.54%, such a year-on-yearrate would bring the full-year average to around 53.5%.

Consumer price index, 1998(% change; 1996=100)

Month on month Year on year Foodstuffs General Foodstuffs General

Jan 10.55 7.17 28.97 16.25

Feb 18.41 12.67 48.87 29.99

Mar 5.65 5.27 58.35 36.80

Apr 5.91 4.70 67.77 42.65

May 3.90 5.24 74.19 49.67

Jun 7.07 4.64 88.02 56.67

Jul 12.16 8.56 107.94 68.72

Aug 9.10 6.30 123.34 77.72

Sep 8.61 3.75 138.16 82.40

Oct –1.85 –0.27 125.69 79.41

Nov –0.18 0.08 118.08 78.15Source: BPS.

FDI approvals aresurprisingly strong—

In the first eight months of 1998 the number of domestic investment projectsapproved by the Investment Co-ordinating Board (Baden KordinasiPenanaman Model, BKPM) fell by 57.5% year on year, from 463 in January-August 1997 to 197, and their value by 45.6%, from Rp79.9trn to Rp42.9trn.Foreign investment approvals held up much better: their value fell by 29.2%,from $16.6bn to $11.8bn, and the number of approved projects actually in-creased by 29.2%, from 487 to 629. The relative robustness of foreign invest-ment approvals compared with their domestic counterparts is partly explained

28 Indonesia


by the different effects of rupiah depreciation on the two types. For domesticinvestors dependent on imported capital goods, the rupiah cost of investinghas risen, whereas for foreigners the dollar cost of investing in Indonesia hasfallen. The rise in the average rupiah cost of approved domestic investments(Rp218bn per project in January-August 1998, compared with Rp170bn perproject in the same period of 1997) and the fall in the average dollar cost ofapproved foreign investment projects (from $34.2m per project in January-August 1997 to $18.7m) may reflect this fact.

—as their focus shifts— Investors, both foreign and domestic, are now focusing on resource-basedindustries which have low import content. Domestic investment approvals areheavily concentrated in industry (which accounts for 71.3% of total approvalsby value), of which 61.6% is to go to four industries: chemicals, food process-ing, paper and non-metal minerals. Domestic investment has also shown ashift towards agriculture. Foreign investment approvals show a similar pattern:66.1% of approvals by value are for industrial projects, of which just over halfare chemicals projects (chiefly petrochemicals and oil refineries). In valueterms European countries, chiefly the UK and the Netherlands, accounted forby far the largest share of foreign investment approvals in the first eightmonths of 1998 (43.7%, compared with 29.6% from Asia, and the US farbehind with just 4%), although Asian countries accounted for 49% of the totalnumber of approved projects, compared with 14.6% from Europe.

—but realisation is indoubt

How many of these projects will actually be realised remains to be seen. At theend of November the US disk drive manufacturer, Seagate Technology, aban-doned plans for a Rp10trn investment in the Medan Industrial Zone in NorthSumatra, preferring to move to Subic Bay in the Philippines. The serious riotingthat has racked Medan several times this year was reported to be the reason forthe change of mind. Government officials have talked of plans to offer foreigninvestors new incentives, but (specifically on the oil-gas and banking indus-tries) has been more guarded in practice, presumably to avoid offending someof the powerful economic nationalists in the cabinet.

Sectoral trends

Agriculture has notescaped the crisis

Agriculture may be the only sector to grow at all this year (see The economy),but it too has suffered fallout from the economic and political crisis, amplifiedby El Niño-induced drought and longer-term neglect. Rice and cooking oilsupplies have been the main concern, but there have been production, pro-curement and distribution problems with other staple commodities as well.

A multifaceted riceproblem—

The rice problem has eased since late August-mid-September, when it reachedits worst and set off a fresh wave of food riots. After a disappointing secondharvest the UN World Food Programme (WFP) expects that in 1998 output willbe 45.4m tonnes, 8% below last year’s figure, which was itself 4% smaller thanin 1996. Despite the much vaunted achievement of self-sufficiency in 1984,Indonesia has long been the world’s largest rice importer (it imported 3.1mtonnes in 1997). The economic crisis intensified existing production problemsin a number of ways: by breaking down formal and informal credit networks,

Indonesia 29


creating price and exchange-rate distortions, raising the cost of inputs, andpersuading many farmers to switch to higher-margin export crops like palm oiland cocoa. Inflation and shortages also made government procurement pricesunattractive. In January-July domestic rice purchases by the state procurementand distribution agency, BULOG, totalled 134,899 tonnes, 93% less than theamount bought in the same period of 1997. At the same time a highly politicalbattle for control of the procurement and distribution systems has been goingon, involving factions in the new government as well as officials left over fromthe old regime. The rice import trade, hitherto dominated by Suharto associ-ates, has also been in flux. The new government also consistently underesti-mated the scale of imports needed.

—has eased As a result of all these factors the price of rice took off in mid-August. BySeptember 16th the price of rice in Jakarta markets was 85% higher than it hadbeen when Mr Habibie took over in May. However, this price inflation, fol-lowed by the strengthening of the rupiah, helped resolve the problem. It un-dercut the subsidies programme, which had merely encouraged corrupt tradersto sell their subsidised supplies on the international market. As the domesticprice came more closely into line with the international price, availabilityimproved (though affordability was still expected to be a problem for possiblyas many as 17m families). In September the government and the IMF agreed toabolish food subsidies in favour of targeted distribution and scrapping thegovernment monopoly on rice imports. After a brief experiment with the useof co-operatives the old system largely reasserted itself with BULOG at itscentre, but now run by the minister of industry and trade, Rahardi Ramelan,rather than by a Suharto appointee. In its November letter of intent the govern-ment noted that rice prices had fallen by about 15% in most parts of thecountry since mid-September, with important consequences for inflation (seeThe economy). BULOG also claims to have met its import needs until the nextmain harvest (in February-March 1999).

Astra suffers a collapse incar sales

The conglomerate, Astra International, is returning to its core business of carand motorcycle manufacture. This is despite a collapse of domestic sales: inAugust they were 91% lower than a year before. The company is planning tosell off its subsidiaries in semiconductors, plantations, mining and miningequipment. It has foreign debts of roughly $2bn, mostly owed to Japanesebanks, and domestic debt of Rp2trn; it stopped making payments on bothseveral months ago. On October 23rd Astra formally announced that it washalting interest payments on more than half its $1.9bn debt for up to twoyears. The company is even willing to give up majority control of its carproduction subsidiaries. Daihatsu and Toyota are both reported to be interestedin increasing their stakes in the company.

Tourism gains no benefitfrom the weak rupiah

Tourism, the country’s third largest source of foreign exchange in recent yearsafter oil and gas and textiles and garments (in 1997 it earned $6.62bn), has notbenefited from the falling rupiah. In late November the government was pre-dicting that at best arrivals would reach only 75% of the revised target of 4.5m,which itself is 10% below last year’s actual arrivals of 5.04m. In the first eight

30 Indonesia


months of 1998 the number of arrivals fell to 2.24m, down by 21.5% on thesame period of 1997, while earnings dropped by 22.4% to $2.27bn.

From the middle of 1997 tourist visits started to drop, reflecting the bad public-ity associated with the forest fires that were creating haze in many parts ofIndonesia and beyond, as well as the impact of the financial crisis, particularlyon arrivals from other countries in the region. The outturns for the year werebelow target in terms of both arrivals (original target: 5.3m) and earnings($7.6bn). In late October the director-general of tourism, I Gde Ardhika,blamed the sector’s poor performance on “negative coverage” of the country’spolitical situation and on the financial crisis, which had particularly affectedarrivals from Asia.

A massive oversupply ofcement looms

In the first nine months of the year cement sales fell by nearly 30% comparedwith the same period of 1997, from 20.2m tonnes to 14.3m tonnes. Industrysources expected full-year consumption to reach 18m tonnes. Indonesia, whichimported cement until 1996, now faces the prospect of idle plant or a massivesurplus as a result of declining demand and increased capacity (now 42mtonnes, according to industry sources).

Finance and banking

A new banking package isannounced—

The last three months have been a period of frenetic activity in the bankingsector (see box: Recent developments in the banking sector). On August 21stBank Indonesia announced a package of measures for the recapitalisation ofbanks and the improvement of banking regulations and laws. It also an-nounced follow-up action affecting the 14 banks taken over or suspended inApril (3rd quarter 1998, page 30), as well as plans for the merger of four statebanks into a single bank, Bank Mandiri. It set a deadline of September 21st forthe 14 problem banks to repay Bank Indonesia liquidity support and inter-group loans that exceed the legal limit of 20%. (See box: Bank Indonesia’sAugust 21st package.)

On September 29th the governor of Bank Indonesia, Syahril Sabirin, spelledout the recapitalisation process in greater detail. Following due diligenceaudits, banks would be placed in three categories: group A (those with capitaladequacy ratios of 4% or more); group B (those with CARs between –25% and4%); and group C (those with CARs of less than –25%). Only group B bankswould be eligible for the recapitalisation programme, although group C bankscould also qualify if they could raise their CAR above –25% within one monthof the completion of due diligence. They would be required to repay the centralbank’s liquidity assistance and to submit a business plan within one month ofbeing audited, showing how they would bring intergroup loans down to 20%of total loans by the end of 1998 and raise their capital adequacy ratios to 8%by the end of 1999. For every rupiah of fresh capital injected into a group Bbank by its owners or by other investors, the government would put up Rp4. Inreturn for its injections of capital (which are to be funded by bond issues) thegovernment would receive equity stakes in the banks. Bank owners would thenhave three years to redeem part or all of the government stake.

Indonesia 31


—posing the challenge forIBRA—

As the September 21st deadline for the problem banks to pay back liquiditysupport and related-party loans neared, the authorities stepped up the pressure.Failing to meet the deadline could mean criminal prosecution, the attorney-general warned. By mid-September 106 bankers had been prohibited fromleaving the country, the minister of justice, Muladi, announced. Several werehauled in for questioning, including Bambang Trihatmodjo, Suharto’s secondeldest son (see The political scene). Most were suspected of either breaching thelimits on lending to affiliates (BMPK, batas maksimum pemberian kredit) ormisusing liquidity assistance (BLBI). The level of intergroup lending disclosedby their audits was reportedly very high—Bank Dagang Nasional Indonesia(BDNI) 91%, Bank Umum Nasional 78.4%, Bank Modern 63.2% and BankDanamon 43.8%, according to the news magazine, Forum Keadilan.

At least two of the three largest recipients of BI liquidity assistance, Bank CentralAsia (BCA), Bank Dagang Nasional Indonesia (BDNI) and Bank Danamon(which jointly accounted for close to two-thirds of the Rp146trn, $11bn,pumped into the banking system) reached settlements with IBRA. Under these

Recent developments in the banking sector

August 21st: Bank Indonesia announces a package ofmeasures for the recapitalisation of banks and theimprovement of banking regulations and laws.

September 7th: Ten senior officials of Bank Andromeda,including a son of former president Suharto, BambangTrihatmodjo, are forbidden to leave the country, bringing thetotal number of bankers not allowed to go abroad to 106.

September 21st: Only six banks claim to have met therepayment deadline set a month before.

September 28th: Plans for the merger of the four statebanks are announced. The merger is to be completed withinfour years.

September 29th: The governor of Bank Indonesia fleshesout the bank recapitalisation plan.

On the same day, the finance minister, Bambang Subianto,says that the owners of the 15 suspended and nationalisedbanks will have to come up with a repayment plan withinone month. They would be required to repay in cash butwould have five years to do so.

October 1st: A presidential advisor, Frans Seda, announcesthat Mr Habibie has ordered the owners and former ownersof banks that have been suspended or taken over to repay BIliquidity assistance and excessive intergroup loans in cashwithin one year or face legal action.

October 8th: At a meeting between the National PrivateBanks Association (Perbanas) and Bank Indonesia, theauthorities say that the recapitalisation deadline may beextended.

October 16th: The DPR approves amendments to thebanking law, strengthening the legal powers of theIndonesian Bank Restructuring Authority (IBRA) and its AssetManagement Unit (AMU).

October 18th: The IMF’s director for Asia-Pacific, HubertNeiss, writes a letter to Mr Habibie, asking the president tobe flexible over the timing of the problem banks’ repayments.

October 31st: Results of the audits of the country’s 77foreign-exchange banks are issued.

November 6th: Mr Habibie agrees to extend IBRA’s life byfour years and places it under the supervision of the financeminister, Bambang Subianto, the agency’s first chairman,who is regarded as one of its strongest supporters. On thesame day, Mr Habibie agrees to extend to four years thedeadline for problem banks to sell assets to repay liquidityassistance and intergroup loans.

November 13th: In the latest IMF letter of intent thedeadline for recapitalisation is extended from December 31stto January 31st, and it is acknowledged that not all eligiblebanks will be recapitalised by then.

32 Indonesia


Bank Indonesia’s August 21st package

Recapitalisation

Financial review of all banks by Bank Indonesia (BI)supervisors and international auditors. To be completed bythe end of October 1998.

On the basis of the results of the reviews, BI will decide whichbanks need to participate in the recapitalisation programme.To be completed by the end of November 1998.

Banks in need of recapitalisation will submit a business planshowing that the owner plans to make a direct injection ofresources or arrange local and/or foreign investment.

Banks whose business plan is considered feasible may obtaincapital from the government provided that:

• the bank’s owner initially absorbs the losses arising fromloans extended to affiliated parties;

• there will be capital injected in the form of fresh moneyfrom the owner or other investors;

• government participation is temporary and its title ofownership is represented by the Indonesian BankRestructuring Authority (IBRA); and

• all bank obligations obtained from BI liquidity support willbe transferred to IBRA, which then converts them into equityor subordinated loans.

Improvement of rules and regulations

Under the draft amendments to the Banking Act of 1992,submitted to parliament on August 4th 1998:

• bank licensing, previously vested with the Ministry ofFinance, will be transferred to Bank Indonesia;

• foreign investors will be given greater opportunity tobecome bank shareholders;

• bank secrecy rules, which hitherto have covered allinformation relating to assets and liabilities, shall coverinformation relating only to depositors and their deposits; and

• IBRA’s operations are given legal basis.

Improvement of prudential regulationImprovements have already been made in extending theleverage of earnings, asset quality and required loan-lossprovision; and in giving guidance on problem loanrestructuring.

Banks are required to meet capital-adequacy ratios of 4% bythe end of 1998, 8% by the end of 1999 and 10% by the

end of 2000, as announced by the government in June.

A Financial Sector Action Committee, comprising theco-ordinating minister for economics, finance and industry,the governor of Bank Indonesia, the minister of finance, theminister of industry and trade, the chairman of IBRA and thestate minister of national development planning andchairman of the national development planning board(BAPPENAS), has been created to improve co-ordinationbetween the technical agencies involved in the restructuringprogramme.

Stricter legal action will be taken against owners andmanagers proved to have violated regulations.

Follow-up action on bank restructuring

State-owned banksBank Exim, Bapindo, Bank Bumi Daya, Bank Dagang Negaraand the corporate business of Bank Rakyat Indonesia are tobe merged into one bank. The government will inject newcapital into the merged bank.

Bank Rakyat Indonesia (BRI) will henceforth concentrate onsmall credits and retail banking to support small-scaleenterprises and co-operatives.

The non-performing loans of the state banks (BRI’snon-performing corporate credits only) will be transferred tothe Asset Management Unit (AMU) of IBRA.

Suspended banksThe assets of the seven banks suspended on April 4th (BankSurya, Bank Subentra, Bank Istismarat, Bank Pelita, BankHokindo, Bank Deka and Bank Centris) will be transferred tothe AMU. Once the transfer has been made, the liquidationprocess will be carried out and litigation and prosecutionundertaken.

Taken-over banksOf the seven banks Bank Danamon, Bank Modern, BankUmum Nasional, Bank BDNI, Bank PDFCI, Bank Tiara andBank BCA, the operations of three (BDNI, Bank UmumNasional and Bank Modern) will be suspended, while theother four will be retained by the government with a view torestructuring their capital. The government has been told bythe owners of Bank BCA, Bank Danamon, Bank BDNI andBank Umum Nasional that they are willing to provide certainamounts of funds and assets. The government has set acondition that the funds and assets provided by theowners-founders must cover all credits extended to theirgroups and affiliates as well as BI liquidity support.

Indonesia 33


agreements the owners would have five years to pay. The owners of BankModern (Samadikun Hartono), Bank Umum Nasional (Bob Hasan) and BankSurya (Sudwikatmono) were all reported to be have reached partial settlementswith IBRA.

—of not becoming apolitical football—

The deals failed to win presidential approval, however. Mr Habibie insistedinstead that the banks should pay back the credits in cash within one year. Ina letter to Mr Habibie dated October 18th the IMF’s Hubert Neiss askedMr Habibie to be flexible over the timing of the repayment, noting that incurrent conditions the sale of assets would not raise much cash and couldseriously disrupt the management of the companies sold. On November 6thMr Habibie agreed to repayments being made over four years, but with 27% ofthe banks’ obligations being met in cash in the first year. He also extended thepowers and life of IBRA.

Whether this endorsement from the president will make IBRA a more effectivebody remains to be seen. In its ten months of existence it has taken over, closedor suspended only 14 of the country’s 212 banks. In the episode of the problembanks’ repayments, it was caught between the bank owners’ desire to stretchout repayments for as long as possible and the wish of powerful governmentfigures and their business allies to accelerate the process, apparently as part oftheir economic nationalist agenda (see Economic policy).

—as it tackles the statebanks

Moreover it has only just begun to address the more serious problems of thestate banks. According to the weekly magazine, Tempo, the four state banksthat are to be merged into Bank Mandiri—Bank Bumi Daya, Bank DagangNegara, Bapindo and Bank Exim—have combined negative capital of Rp130trnand a ratio of non-performing loans to total outstanding credit of around 60%.The three of these banks that have produced financial reports covering thefinancial year July 1st 1997-June 30th 1998 recorded credit growth during thisperiod of 29%, when the banking sector as a whole was suffering from negativespreads and private banks were barely making new loans at all. The suspicion isthat this expansion was aimed at limiting the growth of non-performing loans.

Few banks now meetcapital-adequacy

requirements

Of the 80 foreign-exchange banks that had been audited by the end of theOctober just seven met the 4% CAR requirement. The most vulnerable werebanks that had large amounts of dollar loans, although a handful which hadhigh levels of dollar credit and non-performing loans were relatively soundbecause they had built up their capital through rights issues just before thecrisis struck. This was the case with Bank Panin. About three-quarters of itscredit was in dollars, and non-performing loans represented 44% of its totaloutstanding loans. It was one of the few audited banks with a CAR above 4%.Relatively low dollar lending, however, does not ensure that a bank is in GroupA. Lippo Bank, for example, is not heavily exposed to dollar lending but it dida lot of property lending, which explains its high proportion of problem loansand its negative capital

The six banks whose recapitalisation needs are shown in the table below ac-counted for nearly 27% of total commercial bank credit as of the end of June.Although their recapitalisation needs total nearly Rp20trn, not all are expected

34 Indonesia


to try to raise the funds required to keep them afloat. The two top shareholdersof Bank Niaga, Hashim Djojohadikusumo and the Malaysian businessmanRashid Hussain, are reported to be reluctant to put more money into the bank.By contrast Lippo has been selling assets abroad to raise funds to inject intoBank Lippo. BII (owned by Sinar Mas) may have found a strategic partner, Bankof Tokyo Mitsubishi. Bank Bali may need a strategic investor to reach the 8%CAR required by the end of next year. Assuming that banks do manage to cleartheir balance sheets of non-performing loans and recapitalise, they will have tobuy out the government within three years or be nationalised. Some bankershave warned that this creates an incentive to undertake risky lending.

Six banks’ capital requirements, end-Oct 1998(Rp bn)

Lippo Panin BII Niaga Bali BNI

Rupiah credit 9,288 1,558 7,259 4,203 3,159 50,814

Dollar credita 4,316 6,965 24,317 13,697 8,409 33,337

Total credita 13,604 8,523 31,576 18,171 11,568 84,151

Dollar creditb 3,042 4,908 17,136 9,843 5,926 23,493

Total creditb 12,330 6,466 24,395 14,046 14,335 74,307

Problem loans (%) 48 44 44 44 28 47

Provisions needed 2,974 1,441 5,487 3,160 2,060 17,738

Actual provisions 387 681 1,530 1,201 887 5,802

Existing capital 1,313 1,348 3,230 1,141 1,032 3,430

Capital minus provisions –1,274 588 –727 –818 –142 –8,505

Capital injection neededc 1,977 – 2,764 1,414 834 12,651 Shareholders 395 – 553 283 167 2,530 Government 1,582 – 2,111 1,131 667 10,121

a At Rp14,900:$1 (the exchange rate as of June 30th 1998). b At Rp10,500:$1 (the rate used byBank Indonesia for its recapitalisation programme). c To achieve capital adequacy ratio of 4%.

Sources: SocGen Securities; Tempo.

The stockmarket starts toclimb back

The Jakarta Stock Exchange (JSX) composite index has been strengtheningmore or less in line with the rupiah. On September 21st the JSX CompositeIndex stood at 265.8, its lowest level since April 1993, amid rumours that BankIndonesia was planning to impose Malaysia-style foreign-exchange controls. Ithas since been on an almost uninterrupted climb. Like the rupiah its recoveryhas not been affected by recent political upheavals. On Monday November23rd, the day after the religious riots in Jakarta, the index ended the day at anew high of 428.98.

Foreign trade and payments

The trade surplusballoons—

The depreciation of the rupiah and weak domestic demand have continued tobump up the trade surplus. In the first seven months of the year exports fell indollar terms, but their decline (of 2.9%) was minor compared with the 37.1%slide in imports. Underlying the unimpressive export figures are weak pricesrather than weak volume growth. The 32% fall in oil and gas exports wasalmost entirely due to falling prices. Non-oil and gas exports actually increasedby nearly 6%, despite weak prices, suggesting that volume growth was quite

13,000

12,000

11,000

10,000

9,000

8,000

7,000

200

250

300

350

400

450

500

Sep . . . . Oct . . . Nov . . . Dec

Rp:$; left scale, inverted

Jakarta Composite Index; right scale

Equity prices and the exchangerate, 1998 (a)

(a) Daily data beginning September 1st. Source: Bloomberg.

Indonesia 35


strong. This is surprising given the difficulties exporters reportedly face: costlytrade finance and working capital, partial transportation breakdown and ex-pensive imports. The January-July trade surplus of $13.5bn is already wellabove the full-year 1997 surplus of $11.8bn.

Merchandise trade($ m unless otherwise indicated; fob-cif)

1997 1998 % Jan-Jul Apr May Jun Jul Jan-Jul changea

Exports 30,084 3,754 3,940 4,467 4,655 29,225 –2.9 Oil and gas 6,897 511 648 516 659 4,714 –31.7 Non-oil and gas 23,187 3,243 3,292 3,951 3,997 24,511 5.7

Imports 25,050 1,879 1,931 2,120 2,447 15,747 –37.1

Balance 5,034 1,875 2,009 2,346 2,208 13,478 167.7

a January-July 1998/January-July 1997.

Sources: BPS, Indikator Ekonomi; press reports.

—as some exportsprosper—

Export growth may have slowed a little since July: current-account data for thefirst six months of 1998/99 (April-September) show exports falling by 8.3% inthat period. However data for the first five months (the most recent available)show that a number of manufactured products did very well in dollar terms,among them jewellery, machinery and mechanical appliances (mainly electri-cal goods), chemicals, and pulp and paper. Textiles also put in a much betterperformance than in recent years, growing by 10% year on year in January-May, compared with an average growth rate of just 1.5% in 1992-97, andovertaking oil and gas to become the country’s leading export.

Top ten manufactured exports, Jan-May($ m unless otherwise indicated)

1997 1998 % changea

Textiles 2,766 3,048 10.2

Forestry products 2,391 1,933 –19.5

Jewellery 405 1,226 202.3

Electronics 1,349 1,139 –15.6

Machinery & mechanical appliances 765 995 30.1

Pulp & paper 573 849 48.0

Leather, leather goods & footwear 950 665 –30.0

Chemicals 413 641 55.4

Processed rubber 846 630 –25.5

Processed coconut & palm oil 732 573 –21.7

Top ten manufactures 11,191 11,699 4.5

Total manufactures 13,428 14,433 7.5

Total merchandise exports 21,143 20,088 –5.0

a Calculated from unrounded data.

Sources: Kompas; BPS, Buletin Ringkas.

The exports that have been doing well appear to be ones in which foreigninvestors or suppliers play an important role (such as textiles and electricalgoods) and some natural-resource based goods where low domestic input costs,the weak rupiah and new capacity (often outside Java) have allowed Indonesia

36 Indonesia


to undercut competitors. Paper and pulp is in the second category: US andEuropean producers have been complaining that they are unable to competewith the Indonesian product. Among non-manufactures it is not only oil andgas that have been losing ground: coal was the only non-oil and gas commod-ity to retain its place in the top ten exports in January-May. Copper and palmoil both suffered from weak prices, but export bans and taxes will also have hitpalm oil sales, which fell by 55% in dollar terms in the first five months.

Top ten exports(% of total)

1997 1998Year Jan-May

Crude petroleum 10.3 Textiles 9.9

Gas 9.1 Gas 8.4

Textiles 6.8 Crude petroleum 7.0

Plywood 6.4 Clothing 4.8

Clothing 5.4 Plywood 4.1

Processed rubber 3.7 Processed rubber 3.1

Copper 2.8 Electrical apparatus 2.9

Coal 2.8 Coal 2.7

Palm oil 2.7 Paper & paper goods 2.5

Electrical apparatus 2.6 Chemicals 2.0

Total incl others 100.0 Total incl others 100.0Source: BPS, Indikator Ekonomi.

—and the import collapsecontinues

Imports have fallen across the board. Partly this too reflects weak dollar prices,but the size of the decline in all import categories indicates that volumes werewell down in the first seven months. The fall in intermediate goods importswas the sharpest. The relatively low decline in consumer goods imports prob-ably reflects the large volumes of staples such as rice and sugar that have beenimported this year. The fall in capital goods imports confirms the scale of thedownturn in investment that other indicators have shown (see The economy).

Imports by category, Jan-Jul($ m)

1997 1998 % change

Oil and gas 2,409 1,654 –31.1

Non-oil & gas 22,641 14,093 –37.8 Consumer goods 1,309 994 –24.1 Intermediate goods 15,784 9,500 –39.8 Capital goods 5,548 3,598 –35.1

Total 25,050 15,747 –37.1Source: BPS.

The current account headsfor healthy surplus

The pattern of imports like that of exports may have changed in recent months.Incomplete current-account data for the first half of 1998/99 fiscal year (April-September) suggest that non-oil and gas exports have begun to falter, whileimport growth is not declining as sharply as it was. In addition to the familiarlist of obstacles facing exporters, diminishing stocks of intermediate goodsneeded for exports may also account for this downturn. The slowdown in therate of decline of imports may reflect the need to replenish these stocks as wellas the large volumes of rice imports in August-September (see Sectoral trends).

Indonesia 37


Despite the fall in trade turnover and a probable decline in repatriated earnings,the data also show an increase in the deficit on invisibles. This is probably theresult of low services earnings, particularly from tourism (see Sectoral trends),diminished workers remittances (as Indonesians working elsewhere in the Asiaregion lose their jobs) and continued high interest payments (which, even if notpaid, are recorded as outflows on an accrual basis). Despite this increase in theinvisibles deficit, the current account was still in healthy surplus in the first halfof 1998/99 thanks to the massive trade surplus.

Current account, Apr-Sep($ m unless otherwise indicated)

1997/98 1998/99 % change

Exports 29,101 26,676 –8.3 Oil & gas 5,339 3,610 –32.4 Non-oil & gas 23,762 23,066 –2.9

Imports –23,443 –16,556 –29.4

Trade balance 5,658 10,120 78.9

Net invisibles –7,357 –8,638 17.4

Current-account balance –1,699 1,482 –Source: Business News.

Trade finance is still notbeing taken up

A variety of trade finance facilities is now available. Not many businesses havebeen making use of them because the swap premiums have made them verycostly. Banks have also been reluctant to issue letters of credit, often demand-ing 100% deposit margins. According to a report from the Ministry of Industryand Trade, only $618m of the $5.6bn provided by Bank Indonesia and foreigninstitutions had been used by the banks by the end of October. As a result,exporters have been complaining that they have been forced to give foreignbuyers large discounts in return for raw materials. The minister of industry andtrade, Rahardi Ramelan, revealed on November 27th that he would soon an-nounce a new plan to set up a trade financing agency. Under the scheme, oneof the banks now under IBRA control will take over all existing export financ-ing schemes once its bad assets and liabilities have been stripped out.

The reserves haemorrhagestops

The most recent data on the capital account still do not go beyond 1997/98.Those data revealed a sharp outflow of private capital in the second half of thefiscal year as the economic crisis took hold, which was not offset by inflows ofofficial capital. As a result, gross foreign assets (GFA, which are almost the sameas total reserves plus gold in the IMF’s International Financial Statistics) fell bynearly $11bn in the year to March 1998 (3rd quarter 1998, page 38). Recentdata on the reserves suggest that either the outflow of private capital has ceasedor that it is now being more than offset by inflows of official capital. On two ofthe main measures of the reserves now in use, GFA and liquid reserves (fordefinitions, see footnotes to table below), there has been a marked upturn sinceMarch. On a third measure, net international reserves (NIR), there has beenlittle change since March, presumably because the official borrowing that hasbeen taking place has given rise to a corresponding increase in gross foreignliabilities. Still, as of November 23rd, NIR, at $14.21bn, were above the adjustedtarget in the IMF programme of $11.26bn.

38 Indonesia


Gross foreign assets, 1998($ m)

Mar 31st May 1st May 29th Jun 26th Jul 31st Aug 31st Sep 30th Oct 30th Nov 30th

Liquid reservesa 10,809.9 11,435.3 12,442.9 12,226.8 12,736.4 13,159.5 13,862.5 15,161.7 16,588.4

Other reservesb 5,779.9 6,327.1 6,583.8 6,768.8 6,791.0 6,754.6 6,678.1 6,581.4 6,202.1

Gross foreign

assets 16,589.8 17,762.4 19,026.7 18,995.6 19,527.4 19,914.1 20,540.6 21,743.1 22,770.5

Gross foreign liabilities –2,940.9 –2,940.9 –3,921.2 –3,921.2 –4,896.4 –5,868.5 –5,868.5 –6,805.2 –7,765.1

Net forward positionc –34.0 –34.0 –34.0 –34.0 0.0 0.0 0.0 0.0 0.0

Reserve against foreign-

currency deposits –435.2 –478.0 –441.7 –430.9 –433.3 –527.9 –634.3 –725.4 –795.0

Net international

reserves 13,179.7 14,309.5 14,629.8 14,609.5 14,197.7 13,517.7 14,037.8 14,212.5 14,210.4

a Liquid reserves comprise gold, foreign-exchange securities, other foreign deposits and special drawing rights (SDRs). b Other reserves compriseexport drafts, deposits held in foreign branches of domestically owned banks and deposits placed in foreign banks to guarantee letters of credit.c Forward claims on non-residents minus forward liabilities.

Source: Bank Indonesia.

The rupiah appreciates— Between its June low and late October (since when it has been more or lessstable), the rupiah appreciated by around 55%, far more than the currencies ofsuch regional neighbours as Thailand, the Philippines or Japan, which werealso strengthening against the dollar. This was also a far faster appreciationthan the government or the IMF had been expecting (they assumed an end-1998 rate of Rp10,600:$1). There were fears that with inflation high thestrengthening might go so far as to wipe out any advantage exporters hadgained from the rupiah’s fall. In fact it seems to have helped bring both infla-tion and interest rates down a bit (see Economic policy; The economy).

—and then stabilises What is remarkable about the strengthening of the rupiah is that it has appar-ently been immune to such destabilising events as political shocks and scaresabout the possible imposition of capital controls following Malaysia’s examplein September. Fears of capital controls and a resurgence of student activity didhave some impact on the rupiah in the first half of September, but thereafterthe rupiah strengthened almost consistently, finding a level of Rp7,000-7,500:$1 by late October. On October 21st (when the rate was Rp7,125:$1) theminister for economics, finance and industry, Ginanjar Kartasasmita, said thata fair value for the rupiah would be Rp7,000-8,000:$1. There were hints fromthe central bank that it would be happy to see the currency break through theRp7,000:$1 barrier.

The rupiah owes its apparent immunity to political and other events—includingthe turbulent MPR session in mid-November—to a number of factors. It hasbeen strengthening partly because the dollar has been weakening. When therupiah began to appreciate against the dollar, depositors moved from dollar torupiah accounts to take advantage of the unchanged interest differential be-tween the two. Inflows of IMF and other assistance, much of it to pay forrupiah-financed budget projects, has also helped strengthen the currency, par-ticularly in a very thin market (in the last week of November dollar turnover onthe foreign-exchange market was down to $100m; in August 1997 daily

Indonesia 39


turnover was around $1.5bn). Signals from Bank Indonesia that it wants therupiah to strengthen further has probably also helped.

But for how long? In the coming weeks seasonal demand for rupiah (associated with Christmasand Idul Fitri, which are close together this year) will be strong. During the restof the fiscal year catching up with the budget backlog (see Economic policy)will require large amounts of dollars to be converted into rupiah. In the shortterm then the rupiah looks secure. But in the longer term it could weaken againthrough a combination of political instability and economic influences, suchas the large budget deficit and the need to find funds to rescue the banks.

40 Indonesia


Quarterly indicators and trade data

Quarterly indicators of economic activity

1996 1997 1998

2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr

Production: industry Prodn per day

Crude petroleuma m barrels 1.41 1.38 1.40 1.36 1.38 1.37 1.33 1.31 1.27 1.28b

Production: agriculture Qtrly totals

Rubber ’000 tonnes 377 403 388 399 369 396 388 391 389 n/a

Production: mining

Tin in concentrates “ 11.9 14.1 13.8 13.8 12.2 14.1 14.0 11.7 14.4 10.8c

Prices Monthly av

Consumer prices, Jakarta 1990=100 164.9 165.6 167.1 171.5 173.0 176.2 182.5 218.7 258.8 310.6

change year on year % 8.0 7.0 6.4 4.5 4.9 6.4 9.2 27.5 49.6 76.3

Money End-Qtr

M1, seasonally adj Rp bn 49,882 52,398 50,343 58,121 62,127 58,432 67,043 89,223 96,430 90,835d

change year on year % 17.6 19.3 9.7 21.5 24.5 11.5 33.2 53.5 55.2 n/a

Foreign trade Qtrly totals

Exports fob $ m 12,241 12,722 13,610 12,405 13,155 13,942 13,941 12,516 7,572e n/a

Crude petroleum “ 1,303 1,341 1,751 1,582 1,308 1,279 1,311 832 575e n/a

Imports cif ” 11,644 10,668 11,000 10,675 10,737 10,389 9,892 7,206 3,947e n/a

Exchange holdings End-Qtr

Bank Indonesia:

goldf $ m 907 895 875 817 798 753 713 684 698 671

foreign exchange “ 15,146 15,058 17,820 18,610 19,935 19,880 16,088 15,306 17,521 18,603d

Exchange rate

Market rate Rp:$ 2,342 2,340 2,383 2,419 2,450 3,275 4,650 8,325 14,900 10,700

Note. Annual figures for most of the series shown above will be found in the Country Profile.a Including production in Irian Jaya. Excluding condensates. b Estimate for October, 1.29. c Total for July-August. d End-August. e Total forApril-May. f End-quarter holdings at quarter’s average of London daily price less 25%.

Sources: IEA, Monthly Oil Market Report; International Rubber Study Group, Rubber Statistical Bulletin; World Bureau of Metal Statistics, World Metal Statistics; IMF, International Financial Statistics.

Indonesia 41


Foreign tradea

($ m)

Total Japan US Germany Singapore

Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec

Imports cif 1995 1996 1995 1996 1995 1996 1995 1996 1995 1996

Food 3,022.5 3,930.9 28.1 31.3 433.6 394.1 50.6 27.6 23.0 25.2

of which:

cereals & products 1,545.0 1,994.7 13.6 12.9 247.3 180.2 2.7 0.8 1.5 2.6

Pulp 882.3 704.5 12.2 10.2 255.8 183.6 15.3 45.7 58.9 29.8

Textile fibres 1,264.0 1,283.9 79.3 84.3 411.6 324.3 25.8 26.3 4.3 5.8

Petroleum & products 2,957.5 3,641.0 22.2 31.7 68.1 77.9 8.0 4.1 811.4 1,329.1

Chemicals 6,251.4 6,033.2 1,245.3 1,141.4 805.0 830.5 431.1 437.7 501.4 495.9

Textile yarn, cloth & mnfrs 1,307.9 1,265.8 168.5 157.5 86.0 82.2 31.5 42.4 9.4 15.1

Iron & steel 2,406.5 2,333.8 724.4 702.0 101.0 130.3 71.6 59.7 39.2 37.9

Non-ferrous metals 1,018.5 904.9 64.5 76.6 28.8 25.5 41.1 21.5 31.5 30.4

Metal manufactures 640.4 832.9 116.6 142.4 81.4 110.1 47.9 26.9 33.1 42.6

Machinery incl electric 12,699.8 14,303.9 3,703.7 3,572.9 1,672.3 1,875.9 1,507.9 1,910.7 526.9 544.1

Road vehicles 2,983.7 2,673.5 2,303.0 1,888.5 109.1 143.3 180.2 150.9 26.0 33.7

Other transport 606.1 533.9 87.4 97.9 91.4 138.6 133.9 21.0 44.2 24.8

of which:

aircraft 228.7 234.6 0.5 0.6 32.4 64.9 36.7 4.9 20.4 10.8

ships & boats 278.4 243.7 69.4 95.2 49.0 73.1 86.8 9.1 23.8 13.8

Scientific instruments etc 718.1 682.1 291.4 198.5 116.8 117.8 56.1 56.8 57.2 94.9

Total incl others 40,628.7 42,928.5 9,216.8 8,504.0 4,755.9 5,059.8 2,819.2 3,001.4 2,367.5 2,875.3

Total Japan US Singapore South Korea

Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec

Exports fob 1995 1996 1995 1996 1995 1996 1995 1996 1995 1996

Fish & preparations 1,665.3 1,676.8 1,070.1 995.9 129.7 184.3 88.4 70.6 17.9 16.3

Coffee, cocoa, tea etc 1,250.6 1,275.8 137.6 126.1 259.9 328.0 157.4 149.3 18.5 17.5

Rubber, crude 1,965.4 1,922.8 79.2 142.0 937.1 847.4 206.5 170.4 97.8 127.3

Wood, unmanufactured 363.2 326.0 131.0 112.5 34.6 28.3 16.3 12.8 33.3 37.3

Metal ores & scrap 1,883.8 2,034.4 1,073.7 848.0 0.0 0.0 5.6 0.5 196.2 175.1

Petroleum & products 6,442.6 7,243.1 2,636.0 3,225.5 601.0 516.0 624.7 730.9 697.3 923.8

Gas 4,022.0 4,493.9 2,945.8 3,264.1 0.0 0.3 0.0 1.5 744.0 866.9

Animal & vegetable oils & fats 1,383.6 1,567.8 38.6 23.7 55.6 81.3 74.9 33.1 6.9 28.7

Chemicals 1,525.2 1,735.3 135.6 149.4 51.2 67.4 71.4 71.0 43.5 43.9

Wood manufactures 4,663.1 4,842.8 1,633.5 1,922.5 394.9 452.4 69.3 60.8 458.2 434.3

Paper & manufactures 931.7 941.7 22.4 48.5 29.3 36.6 62.2 60.5 27.2 25.6

Textile yarn, cloth & mnfrs 2,713.4 2,834.6 225.7 276.3 129.2 142.0 170.4 181.8 78.6 85.2

Non-metallic mineral mnfrs 343.0 407.9 29.0 28.2 67.9 69.6 39.9 46.6 16.5 4.5

Non-ferrous metals 710.1 665.1 272.4 208.4 2.2 1.6 226.4 257.1 14.9 8.3

Metal manufactures 419.5 432.3 69.4 61.8 83.6 96.3 83.9 77.0 3.3 2.4

Machinery & transport eqpt 3,829.6 5,001.0 290.7 524.2 935.2 1,095.4 1,123.6 1,498.3 44.4 63.1

Furniture 864.4 952.0 274.0 275.9 164.5 181.3 25.9 28.0 28.2 30.5

Clothing 3,376.4 3,591.5 341.3 301.4 1,097.6 1,206.3 83.6 107.3 12.3 11.3

Total incl others 45,418.0 49,814.7 12,288.3 12,885.2 6,321.7 6,794.7 3,766.7 4,564.6 2,916.7 3,281.0

continued

42 Indonesia


Total Japan US Singapore GermanyJan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec

Imports cif 1997 1997 1997 1997 1997

Food 3,014.3 19.4 311.4 27.8 29.0 of which: cereals & products 1,143.0 4.3 52.9 6.6 1.2Pulp 616.5 16.1 151.6 20.4 24.7Textile fibres & mnfrs 2,201.0 212.9 289.1 20.7 52.4Mineral fuels 4,048.2 37.7 68.2 1,492.6 4.1Chemicals 6,099.1 1,101.7 747.5 660.0 401.8Iron & steel 1,831.0 460.6 46.6 48.7 47.2Non-ferrous metals & mnfrs 890.1 71.0 22.1 39.4 21.2Metal manufactures 1,495.8 322.7 299.7 91.5 64.4Machinery excl electric 9,859.8 2,928.1 1,621.2 465.8 1,014.5Electric machinery 4,412.4 684.0 865.9 212.1 622.6Road vehicles 2,675.5 1,829.3 155.5 59.6 129.7Aircraft 176.6 0.1 36.3 5.5 3.6Ships & boats 379.6 33.1 193.7 71.6 2.4Scientific instruments etc 694.7 198.7 99.9 69.2 82.3Total incl others 41,679.8 8,252.3 5,444.3 3,410.9 2,628.7

Total Japan US Singapore South Korea Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec

Exports fob 1997 1997 1997 1997 1997

Fish 1,541.0 895.5 167.1 55.0 14.9Coffee, cocoa, tea etc 1,266.8 110.8 377.2 177.3 18.8Rubber & mnfrs 1,832.0 126.3 724.5 141.5 108.0Ores, slag & ash 1,546.5 597.7 0.0 0.1 133.7Mineral fuels 13,154.0 6,006.0 524.0 668.9 2,309.4 of which: gas 4,840.1 3,357.3 0.0 0.9 1,131.4Animal & vegetable oils & fats 2,403.2 29.1 138.5 40.8 34.7Chemicals 1,900.1 182.7 70.5 79.7 39.0Wood & manufactures 4,733.6 1,683.1 454.0 121.3 305.4Paper & manufactures 927.2 53.0 27.5 45.1 8.4Textile fibres & mnfrs 2,390.0 238.0 154.7 142.2 65.6Non-metallic mineral mnfrsa 1,211.6 26.7 66.4 774.5 0.7Iron & steel & manufactures 637.3 83.4 57.4 190.9 37.6Non-ferrous metals & mnfrs 938.5 418.7 28.6 293.3 10.4Machinery excl electric 1,223.1 243.9 118.5 497.8 3.6Electric machinery 2,967.1 331.2 801.4 889.8 24.0Road vehicles 347.0 18.8 21.4 104.6 0.3Furniture 799.1 150.7 136.5 71.5 20.9Clothing 2,796.0 189.3 995.1 90.4 7.8Footwear 1,531.0 95.1 660.8 14.6 15.6Total incl others 53,443.6 12,485.0 7,154.5 5,467.9 3,462.2

a Including precious metals & jewellery.

Source: UN, External Trade Statistics, series D.

Indonesia 43


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