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COUNTRY REPORT

Indonesia

1st quarter 1999

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

The Economist Intelligence Unit

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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 scene22 Economic policy26 The economy30 Sectoral trends34 Finance and banking 37 Foreign trade and payments

43 Quarterly indicators and trade data

List of tables9 Forecast summary

11 Economic results and forecasts22 State budget23 Budget assumptions26 Gross domestic product growth by sector27 Consumer price index28 Monetary aggregates28 Money supply, 199829 Maximum guaranteed interest rates31 Manufacturing output, 199831 Manufacturing survey responses32 Shoe production33 Tourist arrivals through the main gateways, Jan-Nov37 Merchandise trade by value, Jan-Nov38 Non-oil and gas exports, Jan-Nov 199838 Exports by category, Jan-Sep39 Main trading partners, Jan-Sep40 Balance of payments40 Gross foreign assets41 Crossborder claims on selected Asian countries43 Quarterly indicators of economic activity44 Foreign trade

Indonesia 1

EIU Country Report 1st quarter 1999 © The Economist Intelligence Unit Limited 1999

List of figures11 Gross domestic product11 Rupiah real exchange rates27 Inflation29 Interest rates and the exchange rate37 Import compression

2 Indonesia


March 4th 1999 Summary

1st quarter 1999

Outlook for 1999-2000: In the current volatile political climate, the chancesof a stable outcome to the present transitional process have diminished but stillcannot be ruled out. GDP will contract again in 1999 as investment falls andexports grow only weakly. During the forecast period, despite high real interestrates, inflation will be higher than before the crisis. Severe import compressionwill continue to keep the current account in surplus.

The political scene: The political laws needed to hold more open parlia-mentary and presidential elections later this year have been passed. Golkar haslost another pillar of its traditional support. Mr Habibie’s star continues towane. Political parties have been mushrooming, but only a few are seriouscontenders for power. The unity of the Ciganjur group of opposition leadershas been tested. Suharto continues to play a political role from behind thescenes. Often violent social unrest shows no sign of abating, and there is someevidence that it is being manipulated for political ends. Separatist sentimenthas been mounting in Irian Jaya and Aceh. The government has offered EastTimor the option of independence.

Economic policy: The budget for 1999/2000 had a mixed reception, and wasamended slightly in parliament. Foreign financing looks like being adequate in1999/2000, and may be more than enough as a result of a reassessment of theimpact of the economic crisis. The government has lowered its unemploymentforecasts.

The economy: The economy shows no sign of having bottomed out. Afterseveral months of stability the rupiah has weakened, inflation has risen andinterest rates have nudged up. The monetary aggregates have remained undercontrol. Investors have been offered tax holidays as foreign investment approv-als slump.

Sectoral trends: Rice farmers are now facing problems of oversupply. Theimpact of the crisis on manufacturing has been uneven; textiles have faredbetter than footwear, for example. The car industry has been among the worsthit. Tourist arrivals fell sharply in 1998 and look like falling again in 1999.

Finance and banking: The bank recapitalisation plan has been delayed, andthe implications could be serious. The plight of the state banks is dire. Therehave been some false dawns on the Jakarta Stock Exchange.

Foreign trade and payments: Severe import compression has continued toboost the trade surplus. Weak prices and feeble Asian demand have hit exports,and trade financing is still scarce. The government expects another balance ofpayments surplus in 1999/2000. The reserves have been recovering. Externalprivate debt remains intractable.

Editor: Leo AbruzzeseAll 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 Presidency is highest executive office, with direct legislative powers and authority toappoint cabinet; the president is elected for a five-year term by the People’s ConsultativeAssembly (Majelis Permusyawaratan Rakyat, MPR); last cabinet reshuffle May 22nd 1998

Head of state The president, B J Habibie. The MPR is nominally the highest authority in the state. Itconsists of members of the elected House of People’s Representatives (Dewan PerwakilanRakyat, DPR) and appointed members, and elects the president and vice-president. TheDPR must approve all laws. The size and composition of both bodies will be changed bylegislation to be approved before the next general election.

National elections May 1997 (DPR), March 1998 (presidential); next DPR election due on June 7th 1999,to be followed by a presidential election in November.

National government Suharto resigned as president on May 21st 1998 after 32 years in power; he wassucceeded by B J Habibie; Golkar controls 325 of the 500 seats in the 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 than200 new parties have been formed. The most important are: PDI Perjuangan, theNational Awakening Party (Partai Kebangkitan Bangsa, PKB), the National MandateParty (Partai Amanat Nasional, PAN) and the Moon and Star Party (Partai BulanBintang, PBB)

President Bacharuddin Jusuf HabibieVice-president vacant

Co-ordinating minister for defence & security General Feisal TanjungCo-ordinating minister for economics, finance & industrial affairs 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 AlatasHome affairs Lieutenant-General Syarwan Hamid Industry & trade Rahardi Ramelan Investment Hamzah Haz Justice Muladi Mines & energy Kuntoro Mangkusubroto Research & technology ZuhalState enterprise rehabilitation Tanri AbengTourism, arts & culture Marzuki UsmanTransport Haryanto Dhanutirto

Central bank governor Sjahril Sabirin

4 Indonesia


Economic structure

Latest available figures

Economic indicators 1994 1995 1996 1997 1998a

GDP at current market prices (Rp trn) 379.2 452.4 532.6 625.5 989.6

Real GDP growth (%) 7.5 8.2 8.0 4.9 –13.7

Consumer price inflation (av; %) 9.6 9.4 8.0 6.7 57.5

Population (m) 190.7 193.8 196.5 200.1 203.8

Exports fob ($ bn) 40.2 47.5 50.2 56.3 50.7

Imports fob ($ bn) 32.3 40.9 44.2 46.2 31.6

Current-account balance ($ bn) –2.79 –6.43 –7.66 –4.89 4.0

Reserves excl gold ($ bn) 12.13 13.71 18.25 16.59 22.71b

Total external debt (disbursed; $ bn) 107.82 124.40 128.94 135.59 155.93

Debt-service ratio, paid (%) 30.7 30.0 36.8 27.8 18.9

Exchange rate (av; Rp:$) 2,161 2,249 2,342 2,909 10,014b

March 4th 1999 Rp8,910:$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 & services 27.9

Transport & communications 6.8 Imports of goods & 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

Politics remains highlyvolatile—

Politics in Indonesia is still in total flux, and predicting its direction over thenext two years is fraught with difficulty. A bewildering number of outcomes areconceivable, ranging from a stable solution to a nationwide breakdown of lawand order. Developing the worst of these scenarios is not difficult. State author-ity has been eroded to the point where it seems beyond the power of existingstate institutions to re-establish it. Political, ethnic and religious tensions haveincreased, and have often exploded into serious violence. The severe economiccrisis has heightened these problems, but the economy has not yet bottomedout and, despite a fragile stabilisation, several of the preconditions for recovery,including a functioning banking system and mechanisms for resolving thecorporate sector’s large external debt, are not yet in place.

—the government haslittle authority—

The president, B J Habibie, has not only failed to establish his legitimacy; hispolitical authority continues to wane. His always narrow political base is be-coming even narrower as he finds it increasingly difficult to accommodate itstwo main components, his Muslim allies and his backers within the armedforces, neither of whom is anyway prepared to give him more than conditionalsupport. He is not alone in being tainted by his long association with hispredecessor and mentor, Suharto. The key institutions of government, includ-ing the cabinet, the legislature and the armed forces (Angkatan BersenjataRepublik Indonesia, ABRI), are also still dominated by leftovers from theSuharto period.

Suspicion about the true loyalties of these people fuels the widely held view thatSuharto is still manipulating events from behind the scenes. This view gainscredibility from the new regime’s failure to bring the former president to acc-ount for the wealth he is alleged to have amassed during his time in office. It isalso widely believed that murky “status quo forces”, thought to be close toSuharto, if not actually acting on his behalf, are provoking some of the ethnicand religious violence in the hope of getting the parliamentary election sched-uled for June 7th called off and authoritarianism restored. The armed forces,overwhelmed by the nationwide epidemic of violence and discredited in theeyes of much of the population by the student killings of May and November1998 as well as by the revelation of earlier abuses committed during the Suhartoera, are themselves divided and seem powerless to stem the descent into chaos.

—and there are fears thatIndonesia’s break-up is

imminent

On top of the social and political divisions, separatist tendencies have beenintensifying, particularly in the provinces of Irian Jaya and Aceh. The newgovernment has recognised the need to dismantle the highly centralised powerstructure developed by Suharto, but its concessions are unlikely to allay separ-atist sentiment in the present inflamed climate, or even perhaps to satisfyresource-rich provinces which feel that they did not reap the benefits due tothem under Suharto’s development state.

The circumstances in which the former Portuguese colony of East Timor be-came part of Indonesia were very different from those in which the Indonesianrepublic initially came into existence, and the annexation of the territory,which has never been recognised by the UN, has been a permanent obstacle to

6 Indonesia


Indonesia’s hopes of achieving international respectability. Offering inde-pendence to East Timor, as the government did for the first time on January27th, boosts its chances of winning international support when for economicreasons it most needs it. If, as expected, the people of East Timor take up theoffer, an increasingly intolerable drain on Indonesia’s financial and militaryresources will be removed. Nonetheless, from a domestic point of view the offerof independence to East Timor carries risks: of intensified separatist feeling aswell as of a backlash among army officers and nationalists who believe thatIndonesia’s prized unity may be at risk. The most prominent leader to emergefrom the popular opposition to Suharto, Amien Rais, is not alone in warningthat a Soviet- or Yugoslav-style break-up is a real possibility.

A turbulent election is inprospect—

Against this turbulent background, the chances are that the election period willbe turbulent too. There are already grounds for fearing that, with inter-commu-nal tensions high, political debate will be poisoned by sectarianism, and thatpolitics will be contested along communal lines, as it largely was until Suhartoput a stop to politics altogether in 1965. With national and local legislativeelections scheduled to be held simultaneously in June, nationally and locallybased conflicts will feed off each other. In the current economic and politicalclimate “money politics” might well distort the electoral outcome, particularlysince it seems that if the governing party, Golkar, has any real assets left, theyare its access to financial resources, both its own and the state’s.

—and it may not producea stable solution

There is no guarantee that the election to the House of People’s Representatives(Dewan Perwakilan Rakyat, DPR) will produce a stable solution. There will beno outright winner at the polls and in the post-election period there will beintensive deal-making and coalition-building, particularly in the interim pe-riod between the parliamentary election in June and the meeting of the highestconstitutional body, the People’s Consultative Assembly (Majelis Permusya-waratan Rakyat, MPR) in October-November to elect a president. The horse-trading needed to elect a president will almost certainly result in the diffusionof power and a compromise. The outcome could be an intolerable level ofpolicy incoherence that will create further pressure for an authoritarian solu-tion. The coming elections could therefore end up creating new political uncer-tainty rather than dispelling it.

But elections will be held— As already noted, this scenario is not the only possible one. Six months ago theEIU set out a benign scenario under which two political blocs would emerge tocontend for parliamentary and presidential power on the basis of the acceptedrules of the game (3rd quarter 1998, pages 6-7). This scenario now looks lessplausible, but a variant of it is still conceivable. The necessary political lawshave been passed and it looks as though the electoral process will proceed totimetable.

It still looks unlikely that a state of martial law will be proclaimed, whichwould short-circuit this process. President Habibie has no incentive to hold onto power without the legitimacy of an election. Only as a reforming president,faithful to his own electoral timetable, does he stand any change of retainingpower. In fact his chances of winning the presidency next November are slim.The main opposition parties, which no longer regard him as a serious threat to

Indonesia 7


their own political ambitions, are more or less prepared to accept him as thefigure who will oversee the transition. The murky political forces which wouldlike to see the parliamentary election cancelled are unlikely to persuade thearmed forces high command that martial law is a politically feasible option: thearmed forces are too discredited and too divided and the momentum of theelectoral process now too strong.

—and a benign outcome isstill possible

Only a handful of the more than 200 political parties that have emerged sinceSuharto’s overthrow will actually contest the election, and even fewer are seri-ous contenders. Three are expected to be the largest vote-winners: MegawatiSukarnoputri’s PDI Perjuangan, Abdurrahman Wahid’s Partai KebangkitanBangsa (National Awakening Party, PKB) and Amien Rais’s Partai AmanatNasional (National Mandate Party, PAN). Others, including Golkar, the PartaiPersatuan Pembangunan (National Development Party) and Partai Bulan Bin-tang (PBB), may win a place at the bargaining table in the coalition-buildingperiod after the parliamentary election. The leaders of the three main partieshave all announced their intention of standing for the presidency in November.

Though there are tensions between them (particularly between AbdurrahmanWahid and Amien Rais), all three are moderates, who may in the end be willingto share power or even settle on an acceptable compromise candidate, such asthe sultan of Yogyakarta, the fourth signatory of the joint opposition mani-festo, the Ciganjur declaration, last November, which was effectively reaf-firmed in late January (see The political scene). As was shown in the days afterthe Ciganjur declaration, the greatest challenge to such a consensus will comefrom below. It still remains to be seen whether the Jakarta politicians, even onewith the evident popular appeal of Megawati Sukarnoputri, can control theirgrass-roots supporters.

The preconditions foreconomic recovery are not

yet in place—

The economy continues to suffer from the effects of the economic crisis thathit the country in the latter half of 1997. The collapse of the rupiah left muchof the corporate sector unable to service its massive offshore debts, and deliv-ered a fatal blow to many of the country’s already weakened financial institu-tions. By sharply increasing import costs and forcing the government to adopta tight monetary stance to contain inflationary pressures, it also underminedcorporate profitability and prevented firms from taking take advantage of theincreased competitiveness which the currency depreciation should in principlehave afforded them.

The political and social unrest, partly triggered by the crisis, has in turn intens-ified it. One serious consequence of the unrest has been the flight of manyethnic Chinese (who are the main source of the country’s entrepreneurialskills) together with their capital. Politics also threatens to undermine anyprogress made in stabilising the economy. Thus, after the rupiah strengthenedand inflation and interest rates fell in the final quarter of 1998, politics were areason for the partial reversal of these trends in January 1999. External factorswere at work too. The collapse of the Brazilian Real put emerging markets ingeneral under scrutiny once more, and created new pressures on the rupiah asthe US dollar strengthened and rumours of a Chinese devaluation once againgained ground.

8 Indonesia


—and more externalshocks cannot be ruled out

Although we do not believe that the Chinese will devalue in 1999, there arelikely to be further devaluation scares which will send shockwaves around theAsian region. Thus, although we expect the rupiah to strengthen in 1999, theimpact of this on inflation and on reaching an agreement over the privatesector’s external debt overhang will be less beneficial than might be hoped, aswe expect the exchange rate to fluctuate quite erratically during the year. Thereason for the generally upward trend of the rupiah will be a sound balance-of-payments position, based mainly on a strong current account and large inflowsof official capital, and secondarily (and more problematically) on much health-ier net private capital flows, as outflows continue to decline.

Forecast summary($ m unless otherwise indicated)

1997a 1998b 1999c 2000c

Real GDP (% change, year on year) 4.9 –13.7 –3.0 1.6

Consumer price inflation (av; %) 6.7 57.5 12.8 11.0

Merchandise exports fob 56,297 50,667 50,630 52,190

Merchandise imports fob 46,223 31,617 30,568 32,738

Current-account balance –4,890 4,046 6,272 4,406

Average exchange rate (Rp:$) 2,909 10,014a 8,000 7,619

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

Investment will fall againin 1999—

GDP is officially estimated to have contracted by 13.7% in real terms in 1998.In expenditure terms the component most badly hit by the crisis was invest-ment, which we estimate fell by 38%. The collapse of the banking system andIndonesia’s unresolved private external debt problem starved business of capi-tal. The prospects for both recapitalising the banks and resolving the privatedebt overhang are at best clouded. In the absence of a functioning bankingsystem and the resumption of private capital inflows, the preconditions for arecovery of private investment in 1999 will not be present. Instead, whateverbuoyancy the economy shows this year will come from unaccustomed sources:through government schemes for the provision of working capital, by stimulat-ing agricultural production and by improving the absorption of social safetynet funds, for example. The urban-based, often export-oriented industrial andservices sectors which provided most of the momentum for growth over thedecade leading up to the crisis will show little sign of recovery.

—and exports will belanguid

We expect some of the constraints which prevented exports from growing in1998 will ease in 1999. The EIU expects world trade growth to slow further, to4.3% from 4.6% last year, mainly on the basis of weaker demand in the US andthe EU. Partly offsetting this downturn will be the beginnings of recovery else-where in Asia, including Japan. Trade finance will become more readily avail-able, but with interest rates still high its cost will continue to be prohibitive formany exporters. As the rupiah stabilises in nominal terms, much of the compet-itive advantage gained from its massive depreciation will be eroded by inflationand, with prices still weak, agricultural commodity exporters will not enjoyanother currency windfall. The continued political uncertainty will further re-duce the number of tourists. We do, however, expect exports to be the onlydemand component to grow in 1999, even though by only 2%. Improving

Indonesia 9


external demand and the establishment of the domestic conditions for recoverywill permit a further, moderate acceleration of export growth in 2000.

Inflation will remainabove pre-crisis levels

In the final quarter of 1998 month-on-month inflation settled to moderatelevels from the extremely high rates seen earlier in the year. As a result, bothaverage and end-year inflation came in at levels just below those that had beenassumed by the government and the IMF. The stronger rupiah, the easing ofrice shortages and the stabilisation of money-supply growth, as injections ofliquidity assistance by Bank Indonesia (the central bank) into the banks and tosubsidise staples procurement tapered off, all helped bring inflation down. Anupturn in the consumer price index in January may have been a seasonal blip.

Domestic demand will remain weak throughout the forecast period. However,as developments in 1998 demonstrated, that alone will not guarantee lowinflation. Fiscal and monetary discipline could easily be lost as the electionsapproach, particularly if the government succeeds in catching up on the vastbacklog of aid-financed social security spending. We are assuming that realinterest rates will be kept strongly positive, not least because of the need tomaintain the banking system’s liquidity, as it undergoes another crisis of con-fidence that seems an almost inevitable consequence of the type of radicalrecapitalisation programme required to restore it to health.

Further exchange-rate instability and the resumption of high inflation wouldsimply add to the pressure for interest rates to remain high. Another burst ofmoney creation—possibly related to the election, possibly required by thedemands of the ailing banking system—could set inflation off again. Furthercuts in subsidies, including those on fuel and electricity, are possible later inthe year. And when the recovery begins, it will create new inflationary pres-sures. Replenishing stocks of imported goods will be costly in rupiah terms. Therecovery is likely to be uneven, leading to inflationary mismatches betweensupply and demand. We therefore forecast that inflation will fall sharply fromthe average rate of 57.5% recorded in 1998, but will remain in double digits,above pre-crisis levels,.

There will be furthersurpluses on thecurrent account

The crisis has had a superficially beneficial impact on Indonesia’s externaltrade and payments performance. However, this is largely the result of severeimport compression. As a result, the customary current-account deficit turnedinto a large surplus in 1998. We expect this pattern to persist in 1999 as exportsstagnate and imports contract further. On this basis we are forecasting that thetrade surplus will widen slightly and that, with trade-related services paymentsstable (the largest component on the invisibles side), the current-account sur-plus will widen again. This contrasts with the government’s forecast for1999/2000 which, on the basis of forecasts of more buoyant export and (moreimportant) import growth, projects a narrower surplus. We believe that only in2000 will the surplus begin to erode, as economic recovery stimulates a slowincrease in imports to more normal levels.

10 Indonesia


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 273,793 252,711 243,866 245,085 (5.5) (–7.7) (–3.5) (0.5)

Government consumption 31,850 27,710 26,463 26,463 (0.6) (–13.0) (–4.5) (0.0)

Gross fixed capital formation 134,133 83,162 77,341 76,954(4.5) (–38.0) (–7.0) (–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 119,445 117,653 120,006 123,847 (6.3) (–1.5) (2.0) (3.2)

Imports of goods & services –129,858 –108,042 –106,745 –108,453 (6.6) (–16.8) (–1.2) (1.6)

GDP 434,096 374,694 363,431 369,396 (4.9) (–13.7) (–3.0) (1.6)

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

Review

The political scene

The political laws arepassed on deadline—

Another important milestone en route to this year’s parliamentary and pres-idential elections was passed on January 28th, when the House of People’sRepresentatives (Dewan Perwakilan Rakyat, DPR) approved the three politicallaws changing the rules under which the parliamentary election scheduled forJune 7th will be fought. Differences emerged over three contentious matterscovered in the bills—whether active civil servants should be allowed to bemembers and officers of political parties; what sort of electoral system shouldbe used; and the number of DPR seats to be allocated to the armed forces—and

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.

Indonesia 11


there was some doubt whether the January 28th deadline for passing the legis-lation would be met.

—after Golkar makesconcessions

Despite its overwhelming majority in the DPR, Golkar in the end yielded to theopposition of all the three other parliamentary “fractions” (including the armedforces—Angkatan Bersenjata Republik Indonesia, ABRI—fraction), as well asthreats from extra-parliamentary groups, and accepted that the country’s 4.1mcivil servants should no longer be allowed to play an active role in politics. Thestrongest opposition to the three bills—on political parties, the electoral systemand the composition of the national and local legislatures—came from theUnited Development Party (Partai Persatuan Pembangunan, PPP). Havingwrung concessions from Golkar on civil servants and the less contentious issueof the electoral system, the PPP dropped its other objections, including itsdemand for a much reduced number of ABRI seats. The final law gives ABRI 38seats in the DPR (down from the current 75), and 10% of the seats in localassemblies. Many parties not represented in the DPR continue to argue that anyABRI presence in the house is unconstitutional. The electoral system—propor-tional representation (PR) based on the province—is a variant of the old one thattended to favour locally based candidates The government had originally pro-posed a first-past-the-post system based on the second tier of local government,the district, and then came out in favour of a district-based PR system. The otherfractions had argued that the latter system would favour Golkar which, becauseof the discriminatory provisions of the old law on political parties, is believed tohave the most developed organisation at local level.

Main points of the political laws

• The election will be run on a multiparty system.

• To be eligible to contest the DPR election a party has to be represented in at leastnine provinces and in half of the districts in each of these nine provinces.

• The DPR will have 500 members (as now) and the MPR 700 (previously 1,000),comprising the 500 members of the DPR, 135 regional representatives and 65representatives of social and mass organisations.

• ABRI, whose members will not vote in elections, will automatically receive 38 seatswith voting rights.

• Civil servants may not join political parties, unless with the approval of theirimmediate superiors, and must take leave of absence if they wish to take part inpolitical activities.

• The voting system will be proportional representation based on the province, butto be elected candidates must gain a plurality in their constituencies.

• The national election committee shall consist of five government representativesand one representative of each political party eligible to contest the election.

12 Indonesia


Golkar continues tocrumble—

The political laws probably dealt another blow to Golkar’s prospects in theforthcoming election. Tainted by its close association with the old regime,since May 1998 Golkar has also lost the two main forces which used to ensureit massive votes in DPR elections, the armed forces and the bureaucracy. Themilitary high command has declared its neutrality in the elections. Many ofthe retired senior officers, who used to form the backbone of the Golkar execu-tives in the provinces, have deserted the party for the newly created PartaiKeadilan Persatuan, led by a former defence minister, Edi Sudradjat. Mr Sudrad-jat lost the battle for the Golkar chairmanship last July to Mr Habibie’s statesecretary, Akbar Tanjung (3rd quarter 1998, page 15). The support of the armedforces commander, General Wiranto, was probably vital to Mr Akbar’s victory.However, Mr Akbar with his modernist Muslim background is not a naturalbedfellow for the secular nationalist General Wiranto, who appears more com-fortable with like-minded politicians such as the leader of PDI Perjuangan,Megawati Sukarnoputri. Another powerful military man, the minister of homeaffairs, Lieutenant-General Syarwan Hamid, has affirmed the neutrality of thecivilian bureaucracy, which under the old system was required to vote forGolkar.

The election timetable

February 1st-March 1st: Registration of parties.

March 1st-April 15th: Registration of candidates for the DPR and localassemblies (DPRD).

March 16th-April 17th: Registration of voters.

May 18th-June 6th: The election campaign.

June 7th: Election day.

June 20th-26th: Announcement of results of elections for district levelassemblies (DPRD II).

June 27th-July 2nd: Announcement of results of elections for provincial levelassemblies (DPRD I).

July 3rd-12th: Announcement of results of DPR election.

July 20th: DPRD II members sworn in.

July 25th: DPRD I members sworn in.

August 29th: DPR and MPR members sworn in.

October 28th-November 10th: MPR session to elect new president.

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Other groups have also deserted Golkar. A number of its component “func-tional groups” have also left for other parties. Several of its most effectivepoliticians, such Siswono Yudohusodo and Sarwono Kusumaatmadja, havejoined Megawati Sukarnoputri’s PDI Perjuangan. The party itself has cast outthe Suhartoists, (known as the Cendana group after the street where the Suhar-tos have their family house), which has meant the loss of an important sourceof funds (see below).

—and its two principalfactions—

What is left are two main factions, grouped around Mr Habibie and Mr Akbarrespectively. Their organisational bases are quite small: ICMI (Ikatan Cen-dekiawan Muslimin Indonesia, the Association of Muslim Intellectuals, theMuslim modernist organisation set up by Mr Habibie in 1991) supportsMr Habibie, and KAHMI (the alumni society of the Himpunan Mahasiswa Islam,a modernist Muslim student group, which peaked in the 1960s) and KNPI (thenational youth organisation) support Mr Akbar. There have been moves withinGolkar to break with Mr Habibie as the symbol of a past with which Golkar itselfneeds to break. (In January Mr Akbar, after much pressure from within the party,apologised for Golkar’s past “wrongdoings and mistakes”.) Mr Habibie has alsobeen trying to take a distinctive position: during the debates on the politicallaws, for instance, he took a more “presidential”, less partisan stance thanMr Akbar by coming out in favour of a neutral civil service.

—cannot agree on Habibiefor president

Perhaps the best indication of the party’s factionalisation is the large numberof candidates for the presidency and the vice-presidency being floated. Theyinvolve various permutations of Mr Habibie, Mr Akbar, General Wiranto, theco-operatives minister, Adi Sasono, the party chairman Marzuki Darusman andthe sultan of Yogyakarta. Faced with the prospect of a much reduced Golkarvote in the DPR election and uncertain of the party’s support, Mr Habibie hasbeen looking for support elsewhere. Feelers have been put out to three Muslimparties—the United Sovereignty Party (Persatuan Daulat Rakyat, PDR), theUnited Development Party (Partai Persatuan Pembangunan, PPP) and theMoon and Star Party (Partai Bulan Bintang, PBB). All of them are expected to doreasonably well in the election, and precisely for that reason may not want tolink their fates to that of Mr Habibie.

Mr Habibie’s starcontinues to wane

Mr Habibie is still regarded as Suharto’s creature, particularly after publicationof what is apparently a genuine transcript of a tapped telephone conversationwith his attorney-general about the ongoing investigation into Suharto’swealth (see below). His public attack on Suharto’s disgraced son-in-law, Lieu-tenant-General Prabowo Subianto, did not go down well with some of thelatter’s Muslim allies, who are influential in the PBB. Opinion polls takenbefore these two embarrassments for the president already showed him trailingas third or fourth choice for president with 10% or less of the vote. He is notregarded as a useful ally.

Mr Sasono keeps everyoneguessing

One great unknown is the political agenda of the populist (and popular) min-ister of co-operatives, Adi Sasono. Mr Sasono has received a lot of attention inthe press, chiefly for his promotion of a “people’s economy” (in the foreignpress he has been dubbed “Indonesia’s most dangerous man”, sometimes with

14 Indonesia


a question mark, sometimes without), but his political intentions remain un-clear. Mr Sasono is formally a Golkar chairman, who could have been an effec-tive vote-winner for the party. His political constituency is Muslim smalltraders, farmers and fishermen, and his ministry controls large amounts offunds earmarked for the needy. Adi Sasono has denied reports that he will leaveGolkar for the newly created Partai Daulat Rakyat (Sovereign People’s Party),which was formed by close associates to appeal to the same constituency as hedoes. But he has said that he will not campaign for Golkar, justifying hisdecision on the grounds that the funds at his disposal as a minister wouldcreate a conflict of interest.

Political parties havemushroomed—

Of the more than 200 parties that have come into existence since Suharto leftoffice, 141 registered at the Ministry of Justice during the registration periodthat ended on March 1st (see box: The election timetable). At most, 60 of theseare expected to cross the next hurdle—screening by an independent committeeto establish whether they truly meet the criteria set out in the political partieslaw. Some will then merge and others will collapse. The most common predic-tion is that 25-35 parties will actually contest the election.

—but only a few areserious contenders—

Of these only a handful will be serious contenders, capable of getting 5% ormore of the vote and thus winning a place at the bargaining table when itcomes to forming a coalition after the election. They are: Megawati Sukarnopu-tri’s PDI Perjuangan, Abdurrahman Wahid’s Partai Kebangkitan Bangsa (Nat-ional Awakening Party, PKB), Amien Rais’s Partai Amanat Nasional (NationalMandate Party, PAN), the former government vehicle Golkar, and perhaps twoMuslim parties, the PBB and the PPP. PDI Perjuangan is expected to win thelargest number of votes and its leader, Megawati Sukarnoputri, is the front-run-ner for the presidency.

—and even they will needto build coalitions

Most observers expect PDI Perjuangan to win 30-40% of the vote. The partyitself predicted in mid-February that it would win 210 of the 462 elective seats inthe DPR, or 45% of the vote. Even then, it would still need to build a coalitionto secure a majority. Party officials have said that a coalition involving the PKBor PAN or both was a possibility. The PAN leader, Amien Rais, has said that a PDIPerjuangan-PAN coalition is conceivable. But Megawati Sukarnoputri andAbdurraham Wahid are natural allies, whereas neither is with Amien Rais.

PAN sets out its stall At its national working meeting held in Bandung in December, PAN nomi-nated, Amien Rais, as its presidential candidate. Amien Rais became the leadingvoice of popular opposition during the demonstrations against Suharto lastyear. PAN was launched last August as a non-sectarian party, but because of itsleader’s own roots in the Muhammadiyah organisation it also has a Muslimbase. The urban elite and the Muslim modernists to whom PAN appeals are notalways easy bedfellows, and there have been signs of strain within the party.

Amien Rais’s reformist credentials remain more or less intact, however. He isstill prepared to take to the streets. He is steadfastly anti-Suharto and his NewOrder, including ABRI’s dwifungsi (its dual security and political function). Hebelieves that despite Suharto’s fall the power structure that he created is stillintact. He has been outspokenly critical of military abuses, most recently in

Indonesia 15


Aceh. He has called for the replacement of the attorney-general, Andi Ghalib,for his half-hearted investigation into Suharto’s wealth. He has been eager topursue recent headline corruption cases. He is vulnerable for his espousal offederalism and possibly for his economic policies (he favours the redistributionof assets and a more inward-looking industrial strategy and is open to the ideaof a currency board).

The Ciganjur group’sunity is tested—

Harmony among the four signatories of the Ciganjur declaration was predict-ably brief. The declaration was signed by four major opposition figures—Abdurrahman Wahid, Amien Rais, Megawati Sukarnoputri, and the sultan ofYogyakarta, Sri Sultan Hamengku Buwono X—on the eve of last November’sMPR session (4th quarter 1998, pages 12-13). In particular AbdurrahmanWahid and Amien Rais have been airing their differences.

—and just about holds up In December Abdurrahman Wahid embarked on a series of controversial meet-ings, which some saw as an attempt to snatch the initiative from Amien Rais.In the name of national reconciliation Abdurrahman Wahid (Gus Dur) metGeneral Wiranto on December 9th, President Habibie on December 12th andthen most controversially Suharto on December 13th and again on December19th. He then called for a four-way meeting, involving Mr Habibie, GeneralWiranto and Suharto (“as a person with a large following”) as well as himself.He suggested that Suharto’s followers had been angered at seeing their mentor“cornered” and had provoked some of the worst of the recent violence inJakarta, West Timor, East Java and South Sulawesi (see below) in retaliation.This brought a sharp rebuke from Amien Rais, who accused Gus Dur of engag-ing in political manoeuvres on his own as well as breaching the Ciganjurdeclaration, one of whose ten points was an agreement to seek an investigationof the former president’s wealth. Amid mounting nationwide turmoil a newtruce between the opposition leaders, brokered by General Wiranto, came intobeing on January 24th, but strains persist.

Suharto remains at thecentre of politics

It is widely believed that Suharto is still pulling strings with a view to disrupt-ing the transition process—as well as the investigations into his and his fam-ily’s wealth. On May 21st last year, the day Suharto resigned, the armed forcescommander, General Wiranto, publicly pledged to protect him. Some, includ-ing Mr Habibie and his attorney-general, Andi Ghalib, have called for publicrestraint in the treatment of Suharto out of respect for his age and achieve-ments, and are thought to have set an example by themselves showing re-straint in their handling of the ex-president. It is widely presumed that Suhartois being protected from prosecution by officials who themselves have some-thing to hide. Hence the power of the veiled threat issued by Suharto’s lawyerlast December that, if a case were brought against Suharto, it would also dragdown “government officials, ex-officials and all the cronies also suspected ofimproper gains through corruption, collusion and nepotism”.

Abdurrahman Wahid, who is also the leader of the traditionalist Muslim organ-isation Nahdlatul Ulama, has also taken a conciliatory stance, though for dif-ferent reasons (see below). This restraint is being shown despite the passage bythe MPR (constitutionally the highest political institution) last November of aresolution calling for Suharto’s wealth to be investigated. Other family mem-

16 Indonesia


bers have been summoned for questioning by the Attorney-General’s Office,including most recently Siti Hardiyanti Rukmana (Tutut) on February 4th toanswer questions about one of her charitable foundations. However only oneimmediate member of the family, the former president’s youngest son,Hutomo (Tommy) Mandala Putra, looks in danger of prosecution.

Mr Habibie’s failure to set up an independent commission to investigateSuharto’s wealth following the MPR resolution (4th quarter 1998, page 16) wasseen as a sign of his half-heartedness. More damning confirmation thatMr Habibie was going easy on Suharto came in the weekly magazine, PanjiMasyarakat, on February 22nd. The magazine published what purported to bethe transcript of a telephone conversation between the president and AndiGhalib. The two discussed the attorney-general’s questioning of Suharto onDecember 9th 1998 in terms that suggested that neither man took the investig-ation entirely seriously. The content of the conversation was important—someMPs wanted to question the president to see if he had violated the MPR resolu-tion, which would be possible grounds for impeachment. But no less strikingwas the fact that the tape appeared to be authentic, meaning that there werepeople tapping the president’s phone and leaking the results to the press,something inconceivable in Suharto’s day.

The shaming of GeneralPrabowo continues—

While the authorities have been proceeding gingerly in the case of Suharto,there has been a concerted high-level campaign to discredit further his son-in-law, Lieutenant-General Prabowo Subianto. General Prabowo was dismissedfrom the army in August 1998, after an inquiry found that he had orchestratedsome of the worst violence during the Jakarta riots of May 1998. The trial of 11soldiers accused of the abduction of political activists in the months leading upto Suharto’s overthrow, in which General Prabowo has already been implic-ated, has been under way since December. In February Mr Habibie accusedGeneral Prabowo of having surrounded the presidential palace with troops onthe day after he was sworn in as president, with the aim of forcing him out ofoffice. General Prabowo issued a detailed riposte from exile in Jordan. His alliessay that he is being made a scapegoat for the armed forces’ transgressions in theperiod around the downfall of Suharto.

On January 4th the military high command announced a large-scale reshuffle,involving 100 senior officers and clearly aimed at consolidating the position ofGeneral Wiranto and at helping to restore ABRI’s reputation. Among thoseremoved were a number of highly placed Prabowo supporters, most with strongIslamic leanings, including the ABRI general chief of staff (the armed forces’number three job), Lieutenant-General Fachrul Razi, and the head of militaryintelligence, Major-General Zacky Anwar Makarim. Their replacement—by theformer army deputy chief of staff, Lieutenant-General Sugiono, and the formercommander of the Central Java Diponegoro division, Major-General TyasnoSudarto—did not reassure those who continue to see the controlling hand ofSuharto in all things. Both men, like General Wiranto himself, had been adju-tants to the former president. Two regional commanders who had failed tocontain violence in their areas (East Java and North Sumatra) were also removed.

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—as ABRI seeks toreposition itself—

Within ABRI there has been some soul-searching about its role under Suharto’sNew Order. The need to rethink the doctrine of dwifungsi (the double functionof the armed forces which gives it a socio-political as well as a security role) hasbeen acknowledged. Dwifungsi became the pretext for many of the less savouryaspects of New Order politics under Suharto: the armed forces’ direct manipula-tion of political activity (including the use of terror), the ubiquitous internalsecurity apparatus, the military’s extensive business activity and a commandstructure that exactly mirrored (and shadowed) the structure of the civilianbureaucracy. There have been few opportunities for calm reflection about theprocess of (in official jargon) “redefining, repositioning and reactualising” ABRIin the current turbulent climate. Five key members of the 23-strong cabinet areactive senior officers, as are about 40% of the country’s provincial governors.

—and cope with mountingunrest

Instead, beleaguered by violence of various kinds throughout the archipelago,ABRI has been casting around vainly to find a response. Changes in structure,such as the separation of the police from the armed forces, to take effect inApril, seem almost irrelevant. Partly because the military’s reputation has beenso badly sullied by its past and recent conduct, many of its responses to thecrisis, such as a plan to set up a 40,000-strong civilian auxiliary force or theissuing of orders to shoot rioters, are widely presumed to be in bad faith. (Theuse of civilian “volunteers” to assist with security during the MPR session inNovember undoubtedly aggravated the violence on that occasion and was apublic relations disaster for General Wiranto—4th quarter 1998, pages 11-12).

A few senior officers are reported to have been pressing for the imposition ofmartial law. Probably reckoning that it would be deeply unpopular (not leastbecause forcing the government to declare martial law was said to be an objec-tive of the Suharto group and therefore would be regarded as tending to con-firm suspicions that Suharto was still controlling events) and would not restorestability anyway, the majority of the high command is against such a move.Instead, General Wiranto has taken measures to quell rioting that fall someway short of a declaration of martial law, although one of them—a plan an-nounced on February 4th to set up a Special Task Force Unit with extra-legalpowers—sounded to some like martial law in disguise. The new unit, under thecommand of the national police chief, General Roesmanhadi, is a 3,300-strongforce drawn from the army, navy and air force and from police special units.On March 1st a battalion from the rapid-reaction force was despatched toAmbon to try to control the escalating violence there.

Social unrest takes manyforms—

Elite politics continues to be conducted against a backdrop of intense socialunrest, much of it violent, which takes a bewildering variety of forms, rangingfrom gang warfare to separatist movements. There was a partial lull duringRamadan, which was most fully observed by the students, but the violencepicked up with a vengeance once the fasting month was over. During the daysof Lebaran, the holiday celebrating the end of Ramadan, several incidents werereported. Some were for reasons related to the holiday, such as workers notreceiving the usual annual bonus.

Economic desperation still drives much of the unrest. Aside from pure crimi-nality—the plundering of plantations, forests and shrimp farms, highway rob-

18 Indonesia


bery and so on—there are protests and occupations relating to land disputes.Suppressed economic grievances, for example of communities that have suf-fered the effects of polluting factories, have also been surfacing, as in Porsea,North Sumatra, where protests against Indorayon’s textile plant have turnedviolent. Protests against local officials continue to take place on a massive scale.In the district of Cirebon in the six months to February, protests were heldagainst 81 of the 421 village heads accused of corruption, collusion and nepo-tism, (korupsi, kolusi dan nepotisme, KKN).

Even in apparently clear-cut instances, where religion (as in the Christian-Muslim violence in eastern Indonesia) or separatism (as in Aceh, North Suma-tra) is apparently the trigger for the violence, other factors are at play. Theinter-communal violence between Christians and Muslims in Ambon andneighbouring islands was triggered by a fight on January 19th between a Mus-lim migrant and a local Christian minibus driver. However, murky politicalmanoeuvring, economic grievances, ethnic tensions, gang rivalries and separ-atist sentiment all seem to have played a part in the ensuing violence which bythe end of February had taken at least 160 lives. Ethnic, religious and economicgrievances as well as the desire to avenge human rights abuses committed bythe military under the previous regime (3rd quarter 1998, page 21) are all fuel-ling the separatist movement in Aceh.

—including a political one There are grounds for thinking that the violence will feed into the elections.Already there have been reports of clashes between supporters of rival parties—between Golkar and PDI Perjuangan supporters in Bali and between PPP andPKB supporters on the north coast of Java. In late February in Lampung PDIPerjuangan supporters attacked the chairman of Partai Demokrasi Indonesia,Budi Hardjono. There is also a danger that communal differences and griev-ances will be channelled through political parties. Leaders of the main partieshave already fallen into line with the government’s proposal that outdoorrallies be kept to a minimum during the campaign.

Fears of election violence are increased by the widely held belief that much ofthe current violence is being manipulated for political ends, and is aimed atgetting the DPR election either cancelled or, if held, discredited. The finger hasbeen pointed at various groups, among them:

• Suharto supporters, either acting spontaneously or at his behest, to discreditthe reform process, and protect the Suharto family’s economic interests;

• extreme Muslim supporters of President Habibie seeking to discredit hisopponents and give him a justification to crack down on them;

• dissident elements within the armed forces seeking to weaken the authorityof the current military leadership and General Wiranto in particular, possiblywith a view to taking over control of the government;

• unscrupulous political leaders seeking to improve their chances in the elec-tions; and

• discontented elements seeking to create chaos and instability for their ownparticular reasons.

Indonesia 19


The most commonly held view is that the current explosion of violence isbeing orchestrated by “status quo forces” (comprising Suhartoists and elementsof ABRI and the civilian bureaucracy). These suspicions are fanned by themilitary leadership’s habit of blaming provocateurs or conflicts among thepolitical elite for the violence, while rarely succeeding in attaching blame toanyone. An investigation by the traditionalist Muslim organisation, NahdlatulUlama, into the wave of mysterious killings in the Banyuwangi area of East Java(4th quarter 1998, page 12) found that the 239 identified killings there wereacts of “political terror”, involving senior ABRI and local government officialsas well as deserters from elite units. At the same time the recent reassessment ofthe impact of the crisis (see Economic policy) has put in question the conven-tional diagnosis that economic deprivation is the main reason for the currentexplosion of violence. There are of course still other explanations—forexample, that it is the explosion of anger at grievances allowed to fester over 30years of authoritarian government.

A dirty war breaks out inAceh—

Separatist feeling is strong, and growing, in the provinces of Irian Jaya andAceh, on the country’s eastern and western extremes. The Habibie governmentseems willing to offer some kind of enhanced autonomy but, as in the case ofEast Timor (see below), that may not be enough, particularly in the northSumatran province of Aceh. A cycle of kidnappings and killings by both armyand separatists has been under way there since the end of December. In the late1980s Aceh was made a Special Military Operations Zone (DOM) to allow themilitary to suppress an insurgent independence movement, Aceh Merdeka.The discovery last July of the mass graves of Aceh Merdeka fighters created anuproar, and forced the government to end Aceh’s DOM status. Amid risingtensions and increased activity by Aceh Merdeka, there has now been a build-up of troops again in the province. Tentative moves have been made to contactAceh Merdeka’s exiled leader, Hasan di Tiro, but his main objective seems to beto negotiate independence.

—and the Irianese test thenew regime’s political

limits

In Irian Jaya (called West Papua by independence forces) reformasi has beenconfronting old-style military repression. A popular “national dialogue” on theprovince’s future status is under way (sparked by a letter to Mr Habibie from agroup of US senators). Those taking part in the dialogue have been intimidatedand in some cases charged with rebellion. People involved in raising the flag ofan independent West Papua (3rd quarter 1998, page 21) have been chargedwith subversion. By contrast, on February 26th a 99-strong delegation of tribal,religious leaders and other notables from Irian Jaya held a meeting withMr Habibie in which several asked that the province be given independence.According to the government news agency, Antara, Mr Habibie reacted calmly.

An independence offer forEast Timor—

On January 27th the government made what sounded like a breakthroughoffer on East Timor, the former Portuguese colony which Indonesia invadedand annexed in 1975-76. If the East Timorese rejected Indonesia’s proposal ofbroad autonomy, the government would be willing to “let go” of the territorywithin a year. It would do this not, as had been proposed by pro-independenceEast Timorese, after an interim period of autonomy leading to a referendum,but as soon as it could gain the necessary approval of the MPR. Mr Habibie

20 Indonesia


subsequently made it clear that he wanted the Timor issue resolved one way orthe other by the end of this year. As a gesture of good faith the East Timorindependence leader, Xanana Gusmão, was released from prison to housearrest on February 11th.

This shift in policy took place on the eve of the latest round of UN-sponsoredtriangular talks, involving Indonesia, Portugal (which the UN still regards asthe administering power) and the UN. A government spokeswoman, DewiFortuna Anwar, explained that Australia’s announcement of its own majorpolicy change on East Timor on January 11th had been decisive. Australia,which had been the only Western country to recognise Indonesian sovereigntyover the territory, proposed instead that the people of East Timor should beallowed to vote on independence after a period of autonomy. According toMs Anwar, the Australian announcement pulled the diplomatic rug from un-der the Indonesians just as they were about to enter the talks.

—causes shock— The Indonesian offer was unexpected for two reasons. It had generally beenpresumed that no Indonesian government would offer East Timor inde-pendence: first, because of the precedent it would set for Indonesian provinceswith separatist leanings; second, because ABRI would veto it, on securitygrounds and for reasons of pride. The explosion of unrest throughout thearchipelago, including separatist unrest, has changed the security argument:the need for ABRI to deploy 20,000 troops in East Timor at a time when theyare needed elsewhere meant that holding on to East Timor actually made itmore likely that Indonesia would fragment. Publicly at least, the armed forcesseem willing to swallow their pride: General Wiranto has said they wouldcomply if it were decided that East Timor was no longer part of Indonesia.

—and some initialdisbelief—

The improbability of an Indonesia turnaround on East Timor caused many todoubt that the offer was being made in good faith, particularly as on theground pro-integration militias, issued with arms by the Indonesian military,were stepping up their activity. Although opening up the possibility of inde-pendence, the government made clear that its preference was that East Timorshould remain part of Indonesia with broad autonomy. The upsurge of militiaactivity was viewed by some observers as a warning that if East Timor chose tobe “let go” the outcome could be a bloody civil war, and therefore was anattempt to force the East Timorese to accept its offer of autonomy. The take-it-or-leave-it tone of the initial offer, including its apparent rejection of the pro-independence leadership’s call for an interim period of autonomy underIndonesian rule, tends to support the view of the Indonesians’ bad faith.

—and may still fall foul ofdomestic politics

Indonesia’s preferred outcome is likely to be overridden by the wishes of the US,Australia and the EU, which by late February were putting together the diplo-matic machinery to smooth East Timor’s transition to independence. The great-est obstacle to East Timor’s independence may now be the stance of MegawatiSukarnoputri’s PDI Perjuangan. Megawati, the current favourite to be Indone-sia’s next president, has come out against the government’s offer, although byearly March there were signs that her party was rethinking its position.

Indonesia 21


Economic policy

A non-transparent budgetfor 1999/2000—

On January 6th President Habibie introduced a budget for the 1999/2000 fiscalyear (April-March) in which expenditure was projected to fall 17.3% below thefinally budgeted amount for 1998/99. Since the 1998/99 outturn is likely todiffer greatly from the final 1998/99 budget, this comparison is not very useful.In the first half of 1998/99 domestic revenues were just about on target, butspending, and in particular capital spending, was way below it (4th quarter1998, page 19). If that trend continued to the end of the year, the budget wason track to record a surplus of 0.7% of GDP, rather the projected 8.5% deficit.There will certainly be some real cuts in expenditure in 1999/2000: the largestprojected fall in spending, on debt servicing, is explicable in terms of a strongerrupiah. But other “cuts”, such as the 9.7% reduction in capital spending, willprobably not turn out to be cuts at all. The likely large gap between the 1998/99budget and the 1998/99 outturn may explain why Mr Habibie suggested that itwas an expansionary budget which would allow public spending to be themotor of the economy.

State budget(Rp bn)

Budget Budget % change,1998/99 1999/2000 year on year

Oil & gas company taxes 49,711.4 20,965.0 –57.8

Non-oil & gas revenue 99,591.1 119,838.8 20.3 of which: income tax 25,846.2 40,626.0 57.2 value added tax 28,940.0 34,697.4 19.9 import duties 5,494.9 2,950.3 –46.3 excise duties 7,755.9 9,360.0 20.7 export tax 942.8 2,594.5 175.2 non-tax receipts 26,660.3 25,799.1 –3.2

Domestic revenue 149,302.5 140,803.8 –5.7

External funds 114,585.6 77,400.0 –32.5 Programme aid 74,044.7 47,400.0 –36.0 Project aid 40,540.9 30,000.0 –26.0

Total revenue 263,888.1 218,203.8 –17.3

Recurrent expenditure 171,205.1 134,555.5 –21.4 of which: personnel expenditure 24,781.4 32,037.1 29.3 domestic debt service 1,940.1 380.1 –80.4 foreign debt service 64,296.3 44,430.8 –30.9 fuel oil subsidy 27,534.0 9,985.8 –63.7

Capital expenditure 92,683.0 83,648.3 –9.7 Rupiah financed 52,142.1 53,648.3 2.9 Project aid 40,540.9 30,000.0 –26.0

Total expenditure 263,888.1 218,203.8 –17.3

Balance 0.0 0.0 0.0

Public savingsa –21,902.6 6,248.3 –

a Domestic revenue minus recurrent expenditure.

Source: Ministry of Finance; Business News.

22 Indonesia


—gets a mixed reception— The largest expenditure items were wages, debt servicing and (controversially)bank recapitalisation. There was also a large increase in the total allocation forthe provinces, which under various headings were allocated Rp53.6trn (nearlyone-quarter of total spending). The sharp cut in fuel oil subsidies may portendlarge price increases (though part of the cut will be due to the lower assumedinternational oil price—see Budget assumptions table).

Some of the revenue projections look overoptimistic. In a depressed economicclimate value-added tax may not be as buoyant as expected. In 1998/99 incometax receipts were boosted by high interest income, but if interest rates resumetheir downward trend (as the government desires) takings may not be as high.Though generally well received (far better than Suharto’s disastrous first at-tempt at the 1998/99 budget in January 1998—1st quarter 1998, page 25),doubts such as these led some observers to question the budget’s assumptions.In particular, the assumed GDP growth rate and exchange rate came under thespotlight. There were other criticisms. One related to the Rp18trn allocation forbank recapitalisation, which is regarded by some members of the House ofPeople’s Representatives (Dewan Perwakilan Rakyat, DPR) as the misuse ofpublic money to bail out reckless bankers. Another condemned the budget astoo “populist”, particularly in its redirection of funds to the provinces. At thesame time it was also criticised for an increase in spending on personnel whichwas well below the rate of inflation.

Budget assumptions1998/99 1999/2000

GDP growth (%) –12.0 0,0

Consumer price inflation (%; year-end) 66.0 17.0

Crude oil price ($ per barrel) 13.00 10.50

Oil production ( ’000 barrels/day) 1,520 1,520

Exchange rate (Rp:$; year-end) 10,600 7,500Source: Ministry of Finance, Nota Keuangan dan RAPBN Tahun Anggaran 1999/2000.

—and some adjustmentsin the DPR

The budget was passed by the DPR on February 26th with a few changes thattook some of these criticisms into account. Overall budget spending was in-creased by Rp1.4trn to Rp219.6trn. Within this total there was a Rp1.5trn(4.8%) increase in spending on civil servants’ pay (from Rp32,037bn toRp33,569bn), which was offset by a Rp1trn cut in the appropriation for thebank recapitalisation programme and Rp500bn of cuts elsewhere. The Rp1.4trnoverall increase is to be covered by raising receipts from excise tax by Rp800bn,from Rp9.36trn to Rp10.16trn, with the rest coming from increased non-taxrevenues, mainly higher dividends from state enterprises.

Foreign financing lookslike being adequate—

In the 1999/2000 budget, unlike this year’s, public savings (domestic revenue minusrecurrent expenditure) are projected to be positive. However they will cover only7.5% of rupiah-financed development spending, leaving another large hole to befilled by aid. The budget projects an aid requirement of Rp77.4trn ($10.3bn at theassumed exchange rate of Rp7,500:$1), compared with the current fiscal year’sRp114.6trn ($10.8bn at the assumed Rp10,600:$1 rate).

By mid-February the government seemed well on the way to reaching this target:

Indonesia 23


• $2.4bn had been promised under Japan’s Miyazawa plan (of which $1.5bn isto come from the Japan Export-Import Bank and $900m from the OverseasEconomic Co-operation Fund—OECF);

• $1bn from the World Bank; and

• $1bn from the Asian Development Bank in 1999/2000—out of $1.52bn inpolicy-based loans which the Bank expects to commit to Indonesia this year.

The remaining $1.9bn was expected to be secured at the annual meeting ofIndonesia’s aid consortium, the Consultative Group on Indonesia (CGI), inJune. This amount could also be more than covered by the rescheduling of debtsdue for repayment in 1999/2000. The minister of finance, Bambang Subianto,told the DPR recently that the government wanted to reschedule $800m ofbilateral debt and $1.9bn of export credits due to mature in the coming fiscalyear. The Japanese government has said that it will start disbursing its newlycommitted funds before the June election. There have also been reports that theIMF too may make an additional commitment of quick-disbursing funds beforethe election. This apparent surfeit of capital will come in useful if (or when) therupiah comes under attack during and after the election.

—and may be more thanadequate—

It is possible that not all of this capital will flow, however, first, because it maynot all be needed and, second, because it may not all be disbursed. At a meetingof the CGI, held in Jakarta on January 25th, 80 representatives of bilateral andmultilateral donor organisations reviewed the progress of Indonesia’s reformprogramme and assessed the impact of international aid on the country. Denisde Tray, the country director of the World Bank, which chairs the CGI, saidthat all aspects of the reform programme—not just the social safety net pro-gramme but the corporate and financial sector programmes as well—must becarried out transparently and efficiently. In fact there are doubts about allaspects of the programme, from the bank recapitalisation plan to the provisionof a social safety net. The World Bank and the IMF may both defer loandisbursements if the bank recapitalisation programme does not go ahead soon(see Finance and banking).

—as the crisis’s impact isreassessed—

With regard to the social safety net, two recent developments particularly influ-enced thinking at the meeting. The first concerned the true social impact of theeconomic crisis; the second was the government’s slow disbursement of socialsafety net funds. Earlier doubts about assessments of poverty levels in the wakeof the crisis (4th quarter 1998, pages 26-27) have been supplemented by doubtsabout its impact on employment and education (on employment, see below).Both developments may cause Indonesia’s capital needs also to be reassessed.There was a hint of this when Mr de Tray said that Indonesia would need $9bnto finance its budget deficit rather than the $10.3bn initially projected.

—and aid disbursement isslow

The slow disbursement of aid for social projects has many causes. There havebeen allegations about the mishandling of aid from Japan and Singapore. Thereis also plenty of evidence of the maladministration of social safety net funds onthe ground. The International Non-Governmental Organisation Forum onIndonesian Development (INFID) has written to the World Bank president,James Wolfensohn, urging him to postpone the disbursement of the social

24 Indonesia


safety net fund until there is “a change in concept, design, target and method-ology”. A government-appointed monitoring committee has also been critical.The Bank has said that it is considering postponing delivery of funds until therequirements for independent monitoring, complaint mechanisms and trans-parency are in place. Barely 30% of the Rp17.79trn allocated for social safetynet spending during 1998/99 had actually been disbursed as of mid-February.On February 18th the government announced that donors and “independentparties” would be involved in monitoring the disbursement of social safety netfunds in the light of protests over lack of transparency and alleged corruption.

There were also allegations of the politicisation of the distribution processbecause the agencies charged with channelling funds had been packed withgovernment or Golkar supporters. There have even been suggestions that dis-bursements were purposefully delayed so that more funds could be distributedcloser to the election. To avoid the tainting of the programme by moneypolitics, opposition politicians have proposed that it should be suspended inthe two months leading up to the election.

The government scalesdown its unemployment

projections—

The government seems to have tacitly scaled down some of its own assess-ments. Last October the minister of manpower, Fahmi Idris, said that one-fifthof the workforce of 92.6m (about 18.5m) was then unemployed and that thetotal would rise to 20m (22% of the workforce) by the end of the year. Theministry arrived at these figures by using GDP/employment elasticity modelsrather than by actual surveys in the field. Such projections had already beencontested by, among others, the International Labour Organisation and theUN Development Programme, which in a joint report published in June 1998had argued that, although the crisis would result in large-scale labour displace-ment, this would not translate into big increases in open unemployment; in acountry such as Indonesia where wages are downwardly flexible and socialsafety nets are minimal, it would instead lead to the spread of work in theinformal sector. It therefore estimated that the number of openly unemployedpeople as of mid-1998 was no more than 6.7m, 7.2% of the labour force.

Surveys undertaken in the past year by government and international agencieshave borne out these conclusions: the proportion of the population in paidlabour seems to have risen, unemployment is up only slightly but real wageshave fallen sharply. Apparently accepting the thrust of this argument, onFebruary 18th Mr Idris told a seminar in Jakarta that unemployment was nowexpected to rise to 16.86m in 1999. The increase was expected largely becauseof the 3.2m people expected to enter the workforce this year.

—and offers a meagreincrease in the minimum

wage

One signal that real wages would fall again in 1998/99 came with the an-nouncement on February 18th that the regional minimum wage is to rise by anaverage of 16.1% in the year beginning April 1st, not nearly enough to make upfor the preceding year’s inflation. A ministry official said that the higher mini-mum wage would be sufficient to cover only 70% of workers’ daily minimumneeds (less than the 76% covered by the minimum wage rise of last October).Last year’s increase was just 15% and came into effect only on August 1st 1998because of the disruption caused by the economic and political crisis (3rdquarter 1998, page 27). For the first time the government is also to set sectoral

Indonesia 25


minimum wages. So far 19 of the country’s 27 provinces have set sectoralminimum wages after discussions between employers’ and workers’ repre-sentatives. The sectoral minimum wage is intended to take into account whatindividual sectors can afford to pay in current circumstances.

The economy

The economy has not yethit bottom—

GDP contracted by 13.7% in 1998, according to preliminary estimates from theCentral Bureau of Statistics (Badan Pusat Statistik, BPS), as the rate of contrac-tion accelerated for the fifth consecutive quarter in September-December, to19.5%. The sectors undergoing the most severe contractions last year wereconstruction (down by 39.7%), financial services (down by 26.7%) and trade,hotels and restaurants (down by 19%).

By far the worst-hit sector in the fourth quarter was financial services—notsurprising given the rising stock of non-performing loans, negative interest ratespreads and the foreign-exchange losses that afflicted the sector last year (seeFinance and banking). In the fourth quarter the rate of contraction of somesectors, such as mining and quarrying and construction, slowed, and two sec-tors—agriculture, animal husbandry, forestry and fisheries, and electricity, gasand water—returned to growth after at least one quarter of contraction. Agri-culture’s modest 0.2% growth, achieved thanks to a year-on-year increase inoutput of 5% in the fourth quarter, raised its share of GDP from 16% in 1997to 18.8% in 1998, but manufacturing remained the largest sector, accountingfor 26.2% of GDP despite its 12.9% contraction.

—despite some promisingfourth-quarter indicators

For most of the fourth quarter, although GDP growth fell by nearly 20% yearon year, the rupiah strengthened, interest rates fell sharply, official capitalflows resumed and inflation showed signs of coming under control. Stabilis-ation, if not recovery, seemed to be under way. Surveys by Bank Indonesia, thecentral bank, and leading indicators suggested that business confidence wasslowly returning and that an upturn might begin in mid-1999.

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

1997 1998 Year 1 Qtr 2 Qtr Jan-Jun 3 Qtr 4 Qtr Year

Agriculture, animal husbandry, forestry & fisheries 0.7 3.0 –2.4 0.3 –0.5 5.0 0.2

Mining & quarrying 1.7 –6.9 –8.3 –7.6 –5.4 –2.1 –4.2

Manufacturing 6.4 –7.1 –19.3 –13.3 –23.0 –19.4 –12.9

Electricity, gas & water supply 12.8 6.4 5.3 0.3 –2.3 6.8 3.7

Construction 6.4 –30.8 –42.9 –36.8 –38.9 –37.5 –39.7

Trade, hotels & restaurants 5.8 –12.7 –22.6 –17.5 –24.9 –22.9 –19.0

Transport & communications 8.3 –0.7 –12.5 –6.5 –17.7 –22.4 –12.8

Financing, leasing & business services 6.6 –9.0 –24.6 –16.9 –21.2 –57.9 –26.7

Other services 2.8 –6.3 –4.0 –5.1 –5.2 –5.2 –4.7

GDP 4.9 –7.9 –16.5 –12.2 –17.4 –19.5 –13.7

Non-oil & gas GDP 5.5 –8.5 –17.8 –13.2 –18.7 –21.2 –14.8Source: Central Bureau of Statistics.

26 Indonesia


The rupiah weakensagain—

From mid-December 1998 these trends began to reverse. First to slip was therupiah, which peaked at Rp7,200:$1 in mid-December before sliding to a low ofRp9,500:$1 on January 25th. External factors (the stronger dollar, the float of theBrazilian Real and fresh Chinese devaluation rumours) and domestic ones (theresurgence of violence after Ramadan, uncertainty about the political bills beingdiscussed in the DPR and about the bank recapitalisation programme) were atwork. There was also new capital flight, reportedly prompted by the leaking of adraft law on foreign-exchange transactions and the exchange-rate system.

—and then finds a newlevel

By early March the rupiah had stabilised at a new rate of around Rp8,800-8,900:$1. One reassuring factor was that the benchmark Indonesian RupiahSingapore Offer Rate (IRSOR) continued to fall during January. (IRSOR is theinterest rate for borrowing rupiah on the Singapore market based on SIBORplus the swap premium, and is taken to indicate the market’s expectations.)

There is an inflationaryblip—

After being negative in October and barely perceptible in November, month-on-month inflation picked up in December, and caused even more concern inJanuary when it rose to nearly 3%. However, the December increase was mainlythe result of higher food prices related to pre-harvest shortages. The Januaryincrease also appears to have been seasonal, mainly due to spending at the endof Ramadan.

Consumer price index(% change; base year 1996)

Month on month Year on year Foodstuffs General Foodstuffs General

1998Jan 10.55 7.17 28.97 16.25Feb 18.41 12.67 48.87 29.99Mar 5.65 5.27 58.35 36.80Apr 5.91 4.70 67.77 42.65May 3.90 5.24 74.19 49.67Jun 7.07 4.64 88.02 56.67Jul 12.16 8.56 107.94 68.72Aug 9.10 6.30 123.34 77.72Sep 8.61 3.75 138.16 82.40Oct –1.85 –0.27 125.69 79.41Nov –0.18 0.08 118.08 78.15Dec 2.94 1.42 132.07 77.62

1999Jan 6.79 2.97 110.93 70.66Source: Central Bureau of Statistics.

The largest increases were in the prices of foods such as meat, chicken and fish(rather than staples such as rice and cooking oil), of clothing and in the transportand communications group (in particular inter-city transport). Government statis-ticians acknowledged that other factors were at work, including disruptions tosupply caused by heavy rains and social unrest. The January upturn could be morethan a blip. Fiscal and monetary discipline could easily be lost as the electionsapproach. Further subsidy cuts, on fuel and electricity for example, are possible laterin the year. And when the recovery begins, it will create new inflationary pres-sures, as stocks of imported goods are replenished, for example.

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Oct Nov Dec Jan

Inflation% change, month on month

Source: Central Bureau of Statistics.

1998199819981998199819981998199819981998 99199819981998 99

Indonesia 27


—but the monetaryaggregates are under

control

Nominal M1 and M2 growth has been slowing year on year since mid-1998,and in real terms M1 has been contracting. Bank Indonesia has continued tostay well within the monetary targets for base (reserve) money and net dom-estic assets (NDA) agreed with the IMF. A 4.4% month-on-month increase inbase money took place in mid-January because of a sharp rise of currency incirculation, that was holiday-related. By the end of the month both basemoney and NDA had contracted again. The relative attractiveness of bankdeposits (because of falling inflation, the still weak economy, high deposit ratesand growing public confidence) helped improve bank liquidity. This, togetherwith repayments of Bank Indonesia liquidity assistance by some of the banksunder Indonesian Bank Restructuring Agency (BPPN) supervision brought thetotal value of outstanding assistance down during January.

Monetary aggregates

(Rp bn)1998 1999

Aug 31st Nov 30th Dec 31st Jan 29th Feb 26th

Reserve money 68,588 73,076 75,121 74,810 77,703 of which: currency in circulation 51,570 46,749 48,506 48,734 49,504 deposits with Bank Indonesia 16,531 25,686 26,191 25,518 27,515

Net domestic assets –64,139 –69,028 –65,436 –76,149 –69,796 of which: net claims on government –49,309 –25,174 –9,019 –24,250 –25,984 net claims on IBRAa 141,523 135,936 119,673 115,456 120,935 liquidity credits 18,088 17,140 17,442 20,133 20,267 to Bulogb 8,131 6,301 5,876 7,781 6,990 open market operations –68,403 –54,469 –58,833 –57,074 –60,490

a Indonesian Bank Restructuring Agency. b Badan Urusan Logistik (food procurement and distribution agency).

Source: Bank Indonesia.

Money supply, 1998(% change)

Jun Jul Aug Sep Oct Nov Dec

M1Month on month 5.3 –3.3 –1.2 –1.9 –2.9 1.4 0.2Year on year 56.5 52.8 57.8 54.8 47.9 44.5 29.2

M2Month on month 14.6 –1.6 –2.8 –1.8 –3.3 3.6 4.8Year on year 80.9 75.2 66.0 67.3 56.1 66.7 62.3

CurrencyMonth on month 5.6 1.1 –3.6 –2.5 –2.9 –4.4 4.3Year on year 89.1 92.8 79.3 78.6 66.8 50.5 45.6

Demand depositsMonth on month 5.1 –6.5 0.7 –1.6 –2.9 5.5 –2.4Year on year 39.7 32.1 49.0 41.3 36.8 40.9 19.8

Memorandum itemInflationMonth on month 4.6 8.6 6.3 3.8 –0.3 0.1 1.4Year on year 56.7 68.7 77.7 82.4 79.4 78.2 77.6Source: Bank Indonesia.

28 Indonesia


Interest rates have firmedagain

The fall in interest rates on benchmark Bank Indonesia Certificates (SertifikatBank Indonesia, SBIs) which began in early September continued into earlyJanuary. Then in response to the weaker rupiah and signs of rising inflationthey began nudging up again, finishing the month at 36.53%, up only slightlyfrom the January low of 35.06% and still far below their early-September peakof 70.58%. At the same time the three-month SBI rate had continued to fall,suggesting to Bank Indonesia that the market expected interest rates also to goon falling in the medium term. However, even if January’s upturn in inflationturns out to have been exceptional and money supply growth stays undercontrol, the upturn in interest rates may not be a temporary blip. Bank Indone-sia has calculated that real interest rates, after being sharply positive in Septem-ber-December fell by 21.5 percentage points in January to barely positive levels,as a result of the moderate fall in nominal rates and the upturn in inflation.The need to keep the banking system liquid at a time when it is faced withcomprehensive restructuring, including closures (see Finance and banking),will create pressure to restore real interest rates to previous levels. Furtherexchange-rate instability and the resumption of high inflation would simplyadd to this pressure.

Maximum guaranteed interest ratesa

1998 1999 Sep 7th-13th Nov 30th-Dec 6th Jan 25th-31st Feb 1st-7th March 1st-7th Rupiah Dollar Rupiah Dollar Rupiah Dollar Rupiah Dollar Rupiah Dollardeposits deposits deposits deposits deposits deposits deposits deposits deposits deposits

1 month 65 15 49 15 42 13 43 13 43 13

3 months 58 14 47 14 38 13 39 13 39 13

6 months 47 14 38 14 35 12 35 12 35 12

12 months 46 14 36 14 34 12 34 12 34 12

24 months 28 18 25 17 25 13 25 13 25 13

Interbank 64 12 45 11 34 7 34 7 34 6

a As prescribed under the regulation of May 29th 1998 on guaranteeing third-party deposits and interbank money market funds.


Foreign investors areoffered tax holidays—

On January 26th the government announced that it was offering tax exemp-tions of up to eight years for new investments in 22 industries. The full eight-year tax exemption is available to projects in designated industries which arelocated outside Java and Bali (entitling them to a five-year tax exemption) andcreate at least 2,000 jobs, invest $200m and have 20% of their equity held byco-operatives (each of which would entitle them to an additional one-yearexemption). If the investors finish construction of their project within fiveyears from the date of approval, they will be entitled to additional tax breaksfor a period equal to the time saved. Among the industries which qualify forpreferential treatment are textiles, leather, oil refining, rubber processing, elec-tronic components, pharmaceuticals, steel, information technology, oil andmining equipment, and vehicles.

—as approvals slump The changes are just the latest in a series of measures announced since May1998 designed to stimulate foreign-investment interest. Most of the changeshave had a liberalising thrust—for example, delegating authority for approving

30

40

50

60

70

11

10

9

8

7

Oct. . .Nov. . .Dec. . . . Jan . . .Feb. . .Mar.

1-month SBI auction rate, %; left scale

Rp '000:$; right scale, inverted

Interest rates and the exchange rate

Sources: Bloomberg.

1998199819981998199819981998199819981998 99199819981998 99

Indonesia 29


projects, reaffirming the principle of a one-stop service and shortening theapprovals process in other ways, and ending the obligation for foreign-investedprojects to locate in industrial estates—although some, such as the reservationof some fields to small and medium-scale business, are clearly inspired by the“people’s economy” lobby. According to the Investment Co-ordinating Board(Badan Kordinasi Penanaman Modal, BKPM), foreign-investment approvals fellby nearly 61% in 1998, from $33.8bn in 1997 to $13.3bn, but investmentrealisation was surprisingly buoyant, rising by 35.4%, from $4.23bn in 1997 to$5.77bn.

Sectoral trends

Rice farmers now face theproblems of oversupply

After two years of drought-induced scarcity, the rice economy now seems to befacing the problems of plenty. By mid-February, as the main rice crop wasbeing harvested, the price of unhulled rice in Central and East Java was re-ported to have fallen as low as Rp700/kg ($0.08/kg), well below the guaranteedfloor price of Rp1,400-1,500/kg. Farmers are being squeezed in several ways.Supplies of imported rice are now abundant: the state staples procurement anddistribution agency (Badan Urusan Logistik, Bulog) imported 4.6m tonnes ofrice during the 1998/99 fiscal year, nearly nine times more than the 523,776tonnes it imported during 1997/98. The possibility of putting tariffs on im-ported rice was being discussed in cabinet in late February, but the World Bankwas reportedly not prepared to tolerate a tariff higher than 5%, well below thelevel needed to protect farmers, according to the government.

Another source of pressure on farmers was the government’s decision in theDecember pre-harvest period to scrap fertiliser subsidies, as agreed with theIMF. Disgruntled farmers were assured that the additional costs would be offsetby higher rice prices. Although the government did raise the floor procurementprice, with supplies plentiful and credit to local Bulog branches scarce, thatprice is apparently not available to many farmers. Production of milled rice isexpected to reach 32m tonnes this year, against consumption of 33m tonnes.

The crisis has an unevenimpact on manufacturing

Beneath manufacturing’s overall contraction of 12.9% in 1998, different indus-tries suffered different fates. Among the worst hit have been the metals, ma-chinery and transport equipment manufacturers surveyed by the Ministry ofIndustry and Trade (see table: Manufacturing survey responses). Non-stapleconsumer goods industries, such as the car industry, and construction-relatedindustries (steel and cement) did particularly badly. The core consumer staplesindustry—food, beverages and tobacco—was least badly afflicted among non-oil and gas manufacturing industries, although it was probably also helped byexport growth. Only oil and gas manufacturing actually grew, probably almostentirely because exports were strong (in volume terms). Export growth alsoexplains the “less bad” performances of the textiles and paper industries.

30 Indonesia


Manufacturing output, 1998a

% change, year on year % share of total(constant 1993 prices) (current prices)

Oil & gas manufacturing 1.8 12.0 Petroleum refining 2.7 4.3 Liquefied natural gas 0.8 7.7

Non-oil & gas manufacturing –14.5 88.0 Food, beverages & tobacco –2.1 51.3 Textiles, leather products & footwear –13.0 7.7 Wood products –18.5 4.9 Paper & printing –11.0 3.1 Fertilisers, chemicals & rubber products –23.3 9.5 Cement & non-metallic products –29.4 2.2 Iron & basic steel –28.7 2.6 Transport equipment, machinery & apparatus –52.0 6.3 Others –23.6 0.4

Total –12.9 100.0

a Preliminary.


Manufacturing survey responsesa

(% of industry sample)

Nov 1997-Apr 1998 Jul-Oct 1998 Transport TransportMetals Machinery equipment Average Metals Machinery equipment Average

Reduced shifts 61 55 75 64 55 29 32 39

Reduced work days 50 27 54 42 46 24 40 36

Temporary shut down 28 24 46 33 49 35 28 37

Dismissed workers – – – – 49 53 30 44

Increased imports of raw materials 29 33 30 31 11 18 18 15

Reduced imports of raw materials 56 42 48 49 64 44 53 54

Reduced imports of capital equipment 22 55 50 42 27 6 22 18

Reduced output by less than 25% 28 27 14 23 18 24 24 22

Reduced output by more than 25% 67 58 79 67 76 71 62 70

Reduced exports by less than 25% 11 27 18 19 12 6 14 11

Reduced exports by more than 25% 28 24 36 29 30 12 26 23

Capacity utilisation compared with normal – – – – 55 45 54 51

a The samples used in the two time periods are not strictly comparable. Most of the transport equipment companies surveyed in the first sample,for example, were car and motorcycle manufacturers who were no longer operating by the time of the second survey, when the sampleconsisted mainly of boatmakers.

Source: Ministry of Industry and Trade.

The textiles industry hasbeen bearing up—

Whether measured by export volume growth (see Foreign trade and payments)or investment interest, textiles and garments have weathered the recessionreasonably well. Low labour costs, the domestic procurement of raw materialsand more or less guaranteed quota markets continue to make the industryattractive. During 1998 the Investment Co-ordinating Board (Badan KordinasiPenanaman Modal, BKPM) approved 76 foreign-invested and 25 domestic pro-jects in the industry, worth around $200m and Rp1.2trn (about $120m) ofwhich about half were for garment production.

Indonesia 31


Garment exports have been growing faster than overall textile exports. Onereason they have maintained their value is that they are sold predominantly toquota markets, which have so far been relatively immune to economic slow-down. Excluding exports using the PEBT (notice of export of certain products)facility, in 1997 over half (54.3%) of Indonesia’s garment exports by value wentto quota markets (Canada, France, Germany, the UK and the US). The largestnon-quota markets were all relatively small: Japan (6.5% of the total), theUnited Arab Emirates (6.2%) and Saudi Arabia (5.1%). Also sustaining exportsin 1998 was improved quota utilisation. The minister of industry and trade,Rahardi Ramelan, told the DPR in September that Indonesia had by thenalready used 85% of its 1998 export quota, and was well ahead of its main Asiancompetitors in quota utilisation rates in the 14 “hot” categories.

—while the shoeindustry’s long-term

problems—

By contrast, exports of footwear and investor interest in the industry have beenflagging. In the first 11 months of 1998 only two new foreign-invested projects,with a combined value of $5.9m, were approved by the BKPM. Because of itsheavy focus on production of sports shoes the industry is vulnerable to shifts indemand in the two main markets, the US and the EU. On this front Indonesiahas been losing ground for some time: in the second half of 1996 China over-took Indonesia as the main Asian source of exported shoes, and has sinceconsolidated its leading position in the market. Vietnam and the Philippineshave also been gaining market share, although with about 6% and 3.5% respec-tively both lag well behind China (about 43%) and Indonesia (about 35%).Adding to the industry’s long-term structural problems, very few shoe compo-nents are produced locally, labour productivity is low compared with compet-itors such as China and South Korea, and the industry has been plagued bylabour disputes in recent years. A 10% duty on imported raw materials has alsonot helped, and there are complaints that cumbersome customs procedureshave been hampering an industry where prompt delivery is a key to compet-itiveness.

Shoe production(’000 pairs; % change year on year in brackets)

1993 1994 1995 1996 1997

Sports shoes 297,254 304,482 351,395 405,802 284,061 (n/a) (2.4) (15.4) (15.5) (–30.9)

Leather shoes 52,467 65,194 74,449 83,921 62,941 (n/a) (24.3) (14.2) (12.7) (–25.0)

Total 349,721 369,676 425,844 489,723 347,002 (n/a) (5.7) (15.2) (15.0) (–29.1)

Source: Department of Industry and Trade.

—have been made muchworse by the crisis

Many of these problems have been exacerbated by the collapse of the rupiahand problems related to the broader economic crisis. Since mid-1997 the costof imported inputs has soared (the price of many inputs, including leather andglue, have more than tripled). This effect has been more than offset by lowerwage costs in dollar terms. In December 1998 Indonesian shoes were reportedto be 10% cheaper than their Chinese equivalents, a reversal of the pre-crisisposition. Despite this gain in competitiveness, however, shortages of workingcapital and trade finance have hit exports severely. In 1997 earnings fromexports of sports shoes fell to $958.9m, 27.1% less than in 1996, and in the first

32 Indonesia


five months of 1998, at only $217.8m, on an annualised basis were on track tofall by a further 45%.

The car industry collapses In 1998 the motor car industry managed to sell only 68,413 units, 83% lessthan the 392,203 units sold in 1997, according to a press release issued by PTAstra on January 15th. Astra itself accounted for most of these sales (40,685units, compared with 195,048 in 1997). Indonesia’s 18 automotive assemblershave a combined capacity of 550,000 units per year. The industry was hit bythe combination of a sharp rise in the cost of their largely imported compo-nents and a severe contraction in demand. Several producers shut down theiroperations during the year, and what production there was was heavily biasedtowards the commercial vehicle end of the market.

Tourist arrivals fell in1998—

The Central Bureau of Statistics estimates that the number of tourists visitingIndonesia in the whole of 1998 through the 11 main gateways was 3.5m, 17.3%less than the 4.23m visitors in 1997. The number entering through all thecountry’s 71 gateways is estimated to have been 4.3m, about 16% down from5.1m in 1997, which was also a disappointing year. The number of arrivals washighly sensitive to political developments: there were large fall-offs in the turbu-lent months of May and November. The largest falls were suffered by Sukarno-Hatta (Jakarta) (down 38.8%), Juanda-Surabaya (down 44.2%) andPolonia-Medan (down 60.3%). Bali did not fare too badly, but the only twogateways to record increased arrivals were Batam (up 4.3%) and Entikong inWest Kalimantan (up 69.6%). These are both special cases: the island of Batamis close to Singapore and largely isolated from events in the rest of Indonesia;Entikong benefited from a flood of visitors from Malaysia taking advantage ofthe cheap rupiah.

—and may fall again thisyear

The situation could well be even worse in 1999. Widespread violence hasalready prompted several countries, including the US, Japan, Singapore and theNetherlands, to issue advisories warning their nationals of the possible dangersof travelling in Indonesia. The rundown of domestic air transport—as a num-ber of local airlines return leased aircraft they can no longer afford, cuttingtheir fleets by about 40%—will also have an impact.

Tourist arrivals through the main gateways, Jan-Nov% change,

1997 1998 year on year

Sukarno-Hatta (Jakarta) 1,345,581 824,420 –38.7

Ngurah Rai (Bali) 1,193,065 1,134,940 –4.9

Batam 1,003,859 1,047,430 4.3

8 others 330,757 189,082 –42.8

Total 3,873,262 3,195,872 –17.5Source: Central Bureau of Statistics.

The energy ministerinsists on a

new-generation contract—

In the midst of the current economic and political turmoil, the governmenthas been seeking to negotiate a new, eighth generation of mining contracts.The new contracts are tougher than the old ones. They create new obligationsin the areas of environmental protection, technology transfer, manpower de-velopment and community development. They also raise from 2.5% to 5% the

Indonesia 33


government’s royalty from mineral sales. Other obligations include annualrent of about $2 per hectare, 30-35% corporate tax, 10% value-added tax onimported equipment and 7.5% tax on dividends.

—for the controversialFreeport—

Among the eighth generation contracts that are being negotiated is one withthe US mining company, Freeport McMoRan. Allegations that various govern-ment officials and Suharto cronies benefited from a previous round of negoti-ations with Freeport in 1991 have been publicly aired in recent months(4th quarter 1998, pages 17-18). In the current negotiations Freeport has beenseeking to expand production at its Grassberg copper and gold mine by about50%, to 300,000 tonnes per year. Suharto had reportedly approved the expan-sion during a meeting with James Moffett, Freeport’s chief executive officer, in1997, and President Habibie apparently upheld it when he met Mr Moffett inlate January. However, Mr Habibie’s mines and energy minister, KuntoroMangkusubroto, has apparently insisted that proper procedures can no longerbe bypassed by presidential fiat, as in the past.

—and comes up with acompromise for Caltex

The mines and energy minister has altered another Suharto-era decision, thisone relating to an oil concession. In its dying days the Suharto regime decidedthat the concession, the Coastal Plains Pekanbaru (CPP) block in Riau, whichhad been assigned to Caltex of the US, should be taken over by the state oilcompany, Pertamina, when Caltex’s contract expires in 2001. In a compromisereview of that decision, Mr Mangkusubroto has accepted Caltex’s argumentthat it is best qualified to install the enhanced oil recovery technology neededto maintain output, but has decided that Caltex and Pertamina should form ajoint venture in which the Indonesian state oil company would have a major-ity share. The minister has also ordered a review of the award by Caltex of acontract to build a power plant to a company in which Suharto associates wereinvolved, on the grounds that tendering rules may have been broken. The CPPblock produces about 78,000 barrels/day of oil.

Finance and banking

The bank recapitalisationplan is delayed—

The bank recapitalisation programme has suffered a serious hiccup. Due dili-gence had been completed on the country’s 166 domestic banks by the end of1998. New banking regulations were issued on January 12th, tightening therules on related-party and other lending. On the basis of estimates that therescue programme would cost about 30% of GDP, an allocation for servicingthe bonds issued to raise the government’s share of the money had been madein the budget (see Economic policy). February 27th had been given as the dayon which the government would announce which banks would be recapital-ised and which would be closed under the scheme. The day before, however,the government called a press conference to say that the announcement wouldbe delayed for two weeks.

How serious a setback this will be is unclear. The governor of Bank Indonesia(the central bank), Sjahril Sabirin, said that the decision to delay the an-nouncement had been made because some banks had not had enough time torevise their business plans to take account of government objections. The

34 Indonesia


economics minister, Ginanjar Kartasasmita, denied that last-minute fears ofpanic by depositors and unrest among bank employees or pressure from well-connected banks threatened with closure had played a part in the decision. Ithad been rumoured that at least 40 banks, and possibly as many as 54, hadbeen recommended for closure by the evaluation team, but the number ap-pears to have been reduced to 16 by the eve of the announcement. Press reportsfrom such respected sources as the weekly magazine, Tempo, suggested thatpolitical influence had been used to take a number of banks off the list. Thegovernment also has a financial interest in closing as few banks as possible: thecost for the government of liquidating the banks is estimated to be more thantwice as high as the cost of recapitalising them.

—and the implicationscould be serious—

The short-term repercussions of the delay were minor: a slight loss of groundby the stockmarket (the Jakarta Stock Exchange index fell by 0.4% to 396.09)and the rupiah (down by 0.3% against the dollar). In the medium term furtherdelay could prevent disbursement of the IMF’s next tranche, which its execu-tive board is due to approve in mid-March. World Bank loans are also at risk. Inthe meantime the banking system will be haemorrhaging losses at a rate ofRp500bn ($56m) per day, according to SocGen Securities estimates, as a resultof negative spreads. The longer-term implications are wide-ranging, includinga possible deferral of the recovery.

—for a process that hasbecome politicised

An earlier move towards recapitalising the banks had already aroused suspi-cions of political bias. On January 18th Mr Habibie signed a presidential regul-ation, authorising government participation in the recapitalisation of 12banks—ten regional development banks (BPD) and two private banks. One ofthe private banks, Lippo Bank, owed by the Riady family’s Lippo Group, was toreceive nearly all the funds, Rp3.75trn (about $430m) of the total Rp4.2trn. In

The recapitalisation programme

Due diligence audits have been carried out on the country’s 166 domestic banks,putting them in categories A (with capital-adequacy ratios—CARs—above 4%), B(with CARs between –25% and 4%) or C (with CARs below –25%)

To qualify for recapitalisation:

• banks must fall in the B category;

• they must themselves raise 20% of the recapitalisation funds needed; thegovernment will provide the remaining 80% through a bond issue, interest on whichwill be covered by the budget (see Economic policy);

• they must come up with an acceptable business plan which shows how, amongother things, they will meet the CAR targets (8% by the end of 1999 and 10% bythe end of 2000) set by the government last year (4th quarter 1998, page 31).

Banks with CARs below –25% may escape closure if they can raise sufficient capitalto lift themselves into the B category.

Indonesia 35


December, as required under the recapitalisation plan, Lippo Bank had alreadyraised through a rights issue the 20% of the total capital needed to bring itscapital adequacy ratio (CAR) up to the stipulated 4%. Members of the House ofRepresentatives (the DPR) thought that the government should have waiteduntil it had approved the large budget allocation for the recapitalisation pro-gramme (see Economic policy). The Riady family’s alleged special treatmentwas thought to have something to do with its supposed closeness to the Clin-ton administration. In fact, more important are the Riady family’s close tieswith the Habibie inner circle (4th quarter 1998, pages 21-22). The DPR’s dis-pleasure forced the minister of finance, Bambang Subianto, to apologise for a“miscommunication” and the regulation was withdrawn.

Audits reveal the plight ofthe state bank

None of the seven state banks would qualify for the recapitalisation pro-gramme under the rules applied to the private banks (see box: The recapitalisa-tion programme). All have CARs of less than –25%. The government iscommitted to rescuing them, nonetheless. The latest plan for the merger ofstate banks into one unit, Bank Mandiri, is now to involve only two banks,Bapindo and Bank Exim. Two others, Bank Bumi Daya and Bank DagangNegara, have been dropped from the scheme, apparently because their situ-ation is far worse than had been initially thought. Data submitted to BankIndonesia (the central bank) in February showed that the four prospectiveparticipants in Bank Mandiri had a combined ratio of non-performing loans(NPLs)/total credit exceeding 90%. About one-third of NPLs had not beenserviced for more than nine months. The four needed to make Rp50trn inprovisions. Only about one-tenth of interest due had been paid, renderinginterest spreads severely negative. By March the cost of recapitalising the fourbanks is expected to reach Rp75trn. The state banks were not only systemati-cally milked during the Suharto era; since his fall they have been under greatpressure to take on the failing loans of collapsing private banks.

There have been someabortive rallies at the JSX

There have been some false dawns on the Jakarta Stock Exchange (JSX). Foreignbuying (largely of blue chips and aimed by most investors at correcting port-folio underweighting) had a heavy impact on the market because overall turn-over was low. The JSX composite index ended 1998 at 398, only 1% down onthe year, making it look like one of the better-performing markets last year.However this was misleading, since the exchange suffered its most seriouscollapse in late 1997, earlier than most other markets, and the rebound camein the closing months of 1998. In the final quarter of the year the index rose by54%, spurred by the stronger rupiah and falling interest rates. Even then theunderlying unattractiveness of the market continued to be evident in the lowdaily volumes.

The JSX composite index rose again, by 10.3%, in the week of January 4th-8thon the strength of foreign buying across the region and a favourable reaction tothe conservative budget announced on January 5th. The fragility of the marketwas demonstrated in the second half of January when it took another knock asthe rupiah weakened, which also dampened interest in the stockmarket. At theend of February the index was still hovering in the 390s.

36 Indonesia


Foreign trade and payments

Import compressioncontinues to boost the

trade surplus

There has been little change in the pattern of foreign trade since our last report,which covered developments in the first seven months of the year (4th quarter1998, pages 35-36). Oil and gas exports have continued to collapse: in the first11 months they fell by 32.4% to $7.2bn. After recording moderate growth inthe first seven months, non-oil and gas exports started to contract: their totalvalue in the first 11 months was slightly (0.8%) less than in the same period of1997. But the most striking feature of the trade account remains the collapse ofimports: in the first 11 months they fell by 35.4%, averaging $2.3bn permonth, compared with $3.5bn per month in 1997. It is this severe importcompression that puts Indonesia on track for a massive trade surplus that couldbe close to $22bn, not far from double last year’s $11.8bn.

Merchandise trade by value, Jan-Nov($ m; fob-cif)

1997 1998 % change

Exports 48,739 44,977 –7.7 oil & gas 10,619 7,177 –32.4 non-oil & gas 38,120 37,800 –0.8

Imports 38,502 24,866 –35.4

Balance 10,237 20,111 96.5Sources: Central Bureau of Statistics, Indikator Ekonomi; press reports.

Weak prices hit exports— The patchy available data suggest that both oil and gas and non-oil and gasexports have not done badly in volume terms, but have been hit by weak prices.Volume sales of oil and gas products did fall in the first 11 months, according toone set of data, but by less than 5%, and most of the 32.4% slide in exportearnings was therefore the result of weak prices.

The pattern was even more marked for most non-oil and gas exports, several ofwhich increased strongly in volume terms if the central bank data reproducedin the table below are correct. Paper and “livestock and products” performednotably well, and textiles did surprisingly well considering the problems thesector has reportedly been facing. According to data from the Central Bureau ofStatistics covering the first nine months of 1998, agricultural goods performed

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov

1997 1998

Import compressionMonthly imports; $ bn


Indonesia 37


strongly in dollar value terms, increasing by nearly 20% year on year, andmanufactures did reasonably well, rising by 4.4%. Earnings from “mining andothers” fell by nearly 40%, and oil and gas exports would have done as badlyhad gas sales not held up.

Non-oil and gas exports, Jan-Nov 1998(% change year on year unless otherwise indicated)

Change in value Change in volume % of total

Textiles & textile products –6.8 21.8 17.0

Wood products –25.8 3.6 10.2

Electrical equipment –16.0 11.4 6.9

Paper 58.2 84.1 6.4

Handicrafts 115.1 34.4 5.3

Chemical products 18.7 35.2 5.0

Livestock & products –2.3 41.9 4.3

Coal 8.5 17.2 4.0

Footwear –30.0 –10.0 3.8

Machinery 1.7 121.1 3.5Source: Bank Indonesia, Tinjauan Kebijakan Moneter, November 1998

Exports by category, Jan-Sep($ m unless otherwise indicated)

% change, % share 1997 1998 year on year 1997 1998

Oil & gas 8,678 5,931 –31.7 22.0 15.9 Crude oil 4,169 2,525 –39.4 10.6 6.8 Petroleum products 989 564 –43.0 2.5 1.5 Natural gas 3,520 2,842 –19.3 8.9 7.6

Non-oil & gas 30,824 31,318 1.6 78.0 84.1 Agricultural goods 2,292 2,744 19.8 5.8 7.4 Manufactures 25,582 26,713 4.4 64.8 71.7 Mining & others 2,951 1,861 –37.0 7.5 5.0

Total 39,502 37,249 –5.7 100.0 100.0Source: Central Bureau of Statistics.

—as does weak Asiandemand

The Asian crisis has had a dramatic impact on Indonesia’s exports. With twoexceptions, exports to all of Indonesia’s main Asian trading partners shrank inthe first nine months; those to Japan fell by nearly 30% in dollar terms. Theexceptions are Singapore and Hong Kong, both of which re-export much ofwhat they import from Indonesia, mainly to the US. This may explain thepuzzling flatness of direct Indonesian exports to the US. Meanwhile Indone-sian products have been expanding their markets in Europe and Australia.

Trade financing schemesare still slow to get off

the ground

Exporters are reportedly still being constrained by the cost and unavailabilityof trade finance. The new export financing agency announced by the govern-ment in November (4th quarter 1998, page 38) has still to get under way. It hasbeen announced that one of the banks placed under government control, BankPDFCI, will be responsible for this and other export financing schemes once itsbad assets and liabilities have been stripped out. Bank PDFCI will provideexport financing and pre-shipment working capital and underwrite refinanc-ing arrangements involving other banks. In a separate announcement, officials

38 Indonesia


have said that the seven state-owned banks, 65 private rural developmentbanks and all joint-venture and foreign banks will be eligible to give creditsunder the scheme. The new banking regulations issued by Bank Indonesia onDecember 31st 1998 exempt funds for exporters from the revised legal lendinglimit (LLL).

Main trading partners, Jan-Sep($ m unless otherwise indicated)

% change, % of total 1997 1998 year on year 1997 1998

Exports to:Japan 9,552 6,728 –29.6 24.2 18.1US 5,321 5,323 0.0 13.5 14.3Singapore 4,024 4,761 18.3 10.2 12.8South Korea 2,471 1,863 –24.6 6.3 5.0Hong Kong 1,335 1,523 14.2 3.4 4.1China 1,641 1,441 –12.2 4.2 3.9Taiwan 1,318 1,253 –5.0 3.3 3.4Netherlands 1,293 1,140 –11.8 3.3 3.1Australia 1,031 1,122 8.8 2.6 3.0Germany 1,075 1,089 1.4 2.7 2.9

Imports from:Japan 6,371 3,395 –46.7 20.0 16.8US 4,187 2,540 –39.3 13.2 12.6Singapore 2,579 1,811 –29.8 8.1 9.0Germany 1,972 1,782 –9.6 6.2 8.8Australia 1,774 1,293 –27.1 5.6 6.4South Korea 1,767 1,094 –38.1 5.6 5.4Taiwan 1,239 720 –41.9 3.9 3.6China 1,137 634 –44.2 3.6 3.1UK 810 614 –24.3 2.5 3.0Thailand 645 569 –38.7 2.0 2.8Source: Central Bureau of Statistics, Indikator Ekonomi..

Trade finance schemes introduced during the crisis include the placing of BankIndonesia funds in foreign banks to guarantee letters of credit and rediscount-ing facilities; Bank Indonesia guarantees to foreign banks which have reopenedcredit lines to national banks in accordance with the terms of the Frankfurtagreement; and a number of bilateral schemes with Australian, Japanese, USand Canadian banks. Other arrangements are being negotiated with Germany,the Netherlands, China, the UK and Singapore. Many of these schemes havebeen slow to get off the ground because of the high swap-rate premiums thatexporters still have to pay

The government expectsanother balance-of-

payments surplus

Mainly on the basis of the massive trade surplus, the government expects thecurrent account to go into a surplus of $4.5bn in the 1998/99 fiscal year (April-March) after years of deficits. This is more or less in line with our own calendar-year-based estimate for 1998. The government also expects the surplus to fallquite sharply in 1999/2000, mainly because it expects imports to recover morestrongly than exports. Its balance-of-payments projections for 1999/2000 showimports increasing by nearly 10% in dollar terms, against export growth of just3.2%. The EIU’s forecasts are for exports to stagnate and imports to fall again.The government is also forecasting a large increase in the invisibles deficit astrade flows pick up; this will also bring the surplus down. In the light of the

Indonesia 39


available data on capital flows, which suggest that the outflow of private capitalslowed markedly in the second half of 1998, the government is forecasting amoderate net outflow of private capital in 1999/2000, which will be more thanoffset by official capital inflows and the current-account surplus. The overallbalance of payments will therefore be in surplus for a second successive year.

Balance of payments($ bn unless otherwise indicated)

1997/98 1998/99 1999/2000Actual Estimate Forecast

Exports (fob) 56.1 50.7 52.3 Oil & gas 10.2 7.1 6.6 Non-oil & gas 45.9 43.6 45.7

Imports (fob) –42.7 –30.9 –33.9 Oil & gas –4.1 –2.8 –2.8 Non-oil & gas –38.6 –28.1 –31.1

Services –15.1 –15.3 –17.1

Current-account balance –1.7 4.5 1.3

SDRs 0 0 0

Official capital 8.3 18.3 11.2 Programme assistance 3.0 12.2 7.2 Project assistance 5.3 6.1 4.0

Debt repayments –4.1 –3.1 –4.3

Other capital movements –11.8 –10.8 –4.9

Basic balance –9.3 8.9 3.3

Errors & omissions –0.7 1.0 0.0

Monetary flow –10.0 9.9 3.3

Memorandum itemsCurrent-account balance/GDP (%) –1.2 4.2 0.9Debt-service ratio (%) 50.7 51.1 42.9Source: Bank Indonesia.

Gross foreign assets($ m)

1998 1999Mar 31st May 29th Jun 26th Jul 31st Aug 31st Sep 30th Oct 30th Nov 30th Dec 31st Jan 29th

Liquid reservesa 10,810 12,443 12,227 12,736 13,160 13,863 15,162 16,588 17,680 18,943

Other reservesb 5,780 6,584 6,769 6,791 6,755 6,678 6,581 6,202 5,919 5,682

Gross foreign assets 16,590 19,027 18,996 19,527 19,914 20,541 21,743 22,791 23,599 24,625

Gross foreign liabilities –2,941 –3,921 –3,921 –4,896 –5,869 –5,869 –6,805 –7,765 –8,729 –8,729

Net forward positionc –34 –34 –34 0 0 0 0 0 0 0

Reserve against foreign-currency deposits –435 –442 –431 –433 –528 –634 –725 –795 –815 –800

Net international reserves 13,180 14,630 14,610 14,198 13,518 14,038 14,213 14,210 14,056 15,096

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.


40 Indonesia


The reserves have beenrecovering

The relative health of the balance of payments has been underlined by thereserves data, which show a steady build-up of the reserves on all measures. Bythe end of January gross foreign assets had recovered to $24.6bn, a level notseen since the third quarter of 1997, with liquid reserves showing the strongestgains. At current depressed levels of imports this amount of gross foreign assetsis sufficient to provide more than six months of import cover. Until the dollarbegan strengthening again in January, this build-up may have owed somethingto the revaluation effects of the stronger yen. At the same time net inter-national reserves have risen far less dramatically, as inflows of borrowed officialcapital have also caused a corresponding increase in gross foreign liabilities.

Indonesia’s private debtremains intractable—

The difficulty that Indonesia is having in resolving its complex private externaldebt problem (4th quarter 1998, pages 23-24) is confirmed in the latest datafrom the Bank of International Settlements (BIS) on international bank lend-ing, published in December. Of the three countries most affected by the Asiancrisis, overall claims against Indonesia fell the least (by $8.4bn) between mid-1997 and mid-1998. By comparison claims against Thailand fell by $22.6bnand those against South Korea by $31.8bn during the same period.

Crossborder claims on selected Asian countries

End-1996 Mid-1997 End-1997 Mid-1998

IndonesiaTotal ($ bn) 55.5 58.7 58.2 50.3Distribution by maturity (%)Up to 1 year 61.7 59.0 60.6 55.0Over 1 year 34.1 35.0 36.1 41.7Distribution by sector (%)Banks 21.2 21.1 19.9 14.2Public sector 12.5 11.1 11.8 15.1Non-bank private sector 66.2 67.7 68.3 70.6

South KoreaTotal ($ bn) 100.0 104.2 93.4 72.4Distribution by maturity (%)Up to 1 year 67.5 68.0 62.8 45.8Over 1 year 20.0 19.7 23.3 38.9Distribution by sector (%)Banks 65.9 65.3 59.2 57.0Public sector 5.7 4.2 4.3 6.6Non-bank private sector 28.3 30.4 36.4 36.3

ThailandTotal ($ bn) 70.1 69.4 58.5 46.8Distribution by maturity (%)Up to 1 year 65.2 65.7 65.8 59.3Over 1 year 30.2 30.4 30.7 36.5Distribution by sector (%)Banks 36.9 37.6 29.9 26.1Public sector 3.2 2.8 3.1 4.2Non-bank private sector 59.6 59.5 66.9 69.6Source: Bank of International Settlements.

—as two benchmarknegotiations get stuck

There is still little sign of progress on resolving the $80bn, private-debt over-hang. Two sets of negotiations have become test cases. On January 26th aleading conglomerate, Bakrie & Brothers, reached an agreement in principle

Indonesia 41


with its chief creditors to swap up to $1.15bn in debt for equity in five Bakriecompanies. However, not all the company’s major creditors were involved inthe deal. Among the absentees were two Japanese banks, Sanwa and Fuji.

Another scheme, proposed by the carmaker, Astra International, which hasabout $2bn in foreign debts and $230m in domestic debt, has run into similarproblems. Astra proposed buying back about $1.2bn of its unsecured debt atabout 30 US cents to the dollar. Japanese creditors are reported to have beenresisting a restructuring that involves deferred payments of interest or write-off.In late February, in an attempt to get round the obstacles to settling such acomplex debt, Astra proposed that the criterion used in the Indonesian bank-ruptcy law (which permits a debt settlement if 50% of creditors representing atleast 66% of the debt outstanding are involved) should be adopted in its debtnegotiations.

42 Indonesia


Quarterly indicators and trade data

Quarterly indicators of economic activity

1996 1997 1998

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

Production: industry Prodn per day

Crude petroleuma m barrels 1.38 1.40 1.36 1.38 1.37 1.33 1.31 1.27 1.28 1.30b

Production: agriculture Qtrly totals

Rubber ’000 tonnes 403 388 398 357 384 366 378 342 334c n/a

Production: mining

Tin in concentrates “ 14.1 13.8 13.8 12.2 14.1 14.0 11.7 14.4 15.4 9.6d

Prices Monthly av

Consumer prices, Jakarta 1990=100 165.6 167.1 171.5 173.0 176.2 182.5 218.7 258.8 310.7 325.5

change year on year % 7.0 6.4 4.5 4.9 6.4 9.2 27.5 49.6 76.3 78.4

Money End-Qtr

M1, seasonally adj Rp bn 53,091 51,242 57,203 60,728 59,388 68,376 87,557 94,076 90,555 88,093e

change year on year % 19.8 9.9 21.0 23.8 11.9 33.4 53.1 54.9 52.5 n/a

Foreign trade Qtrly totals

Exports fob $ m 12,722 13,610 12,405 13,155 13,942 13,941 12,516 12,053 4,579f n/a

Crude petroleum “ 1,341 1,751 1,582 1,308 1,279 1,311 832 868 278f n/a

Imports cif ” 10,668 11,000 10,675 10,737 10,390 9,892 7,206 6,097 2,445f n/a

Exchange holdings End-Qtr

Bank Indonesia:

goldg $ m 895 875 817 798 753 713 684 698 671 684

foreign exchange “ 15,058 17,820 18,610 19,935 19,880 16,088 15,306 17,521 19,275 22,401

Exchange rate

Market rate Rp:$ 2,340 2,383 2,419 2,450 3,275 4,650 8,325 14,900 10,700 8,025

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 January 1999, 1.33. c Total for July-August. d Total for October-November. e End-November. f July only. g 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 43


Foreign trade($ 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

44 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 4.1Chemicalsa 6,099.1 1,101.7 747.5 660.0 401.8Iron & steel & manufacturesb 3,067.8 715.2 322.2 121.7 101.3Non-ferrous metals & mnfrsb 890.1 71.0 22.1 39.4 21.2Tools etc & miscellaneous metal mnfrs 259.0 68.1 24.1 18.5 10.3Machinery 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 & tractors 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 KoreaJan-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 34.7Chemicalsa 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 mnfrsc 1,211.6 26.7 66.4 774.5 0.7Iron & steel & manufacturesb 637.3 83.4 57.4 190.9 37.6Non-ferrous metals & mnfrsb 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 & tractors 347.0 18.8 21.4 104.6 0.3Furniture, heating, lighting, pre-fab fittings 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

Note.. Prior to 1997, SITC basis. From 1997, Harmonised System. Figures are not strictly comparable.a Including crude fertilisers and manufactures of plastics. b Including scrap. c Including precious metals and jewellery.

Source: UN, External Trade Statistics, series D.

Indonesia 45


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