2000:     The Fragile Archipelago

With an external debt to GDP ratio around 100%, continued corruption, the loss of East Timor and its offshore oil reserves, the seccessionist movements in West Papua and Aceh, the world environmental concerns about the exploitation of the archipelago's rich natural resources, civil war in Malutu, ...

the new government may, in the year 2000, be resting on large exports to the US financed by an overvalued US stock market and a strong price of oil in 2000. If these give out, the year 2001 may look different.

Academic debate on the Asian crisis up to 2000.

March 31, 2000     Astra Sold :
Reports indicate that most of the alleged billions of dollars that the Suharto family took from Indonesia will be impossible to retrieve. There is however, an interesting high profile asset, Astra International, 40% of which was owned the Suharto family and had to be forfeited to the IBRA (Indonesia Bank Reconstruction Agency). Astra had $2bn of external debt which it could not service in late-97/early-98 when the rupiah plummeted. During '99 Astra restructured its foreign debt. As of early 2000 a remaining $65bn of Indonesian private external debt needed restructuring but the terms of the Astra restructuring may cause other firms to drag their feet. As chronicled by FEER Feb 2000, top management of Astra and friends of the Suharto family initially impeded the sale to foreign interests, but President Wahid and IBRA were under pressure from the IMF to complete a sale, else a IMF loan disbursement would be postponed. This pressure finally led to the 31mar00 $506mil sale to a consortium led by a Singapore firm. But this is just the first of many sales that are necessary for IBRA to acquire essential resources to recapitalize the banking system. As explained in FEER Aug99, the difficulties around the Astra sale may be the beginning of nationalist sentiment in the new parliament destined to be exercised and the IMF is close to losing control -- $10bn (=SDR 7.5bn) of the $12bn from the Fund has already been disbursed. The military, traditionally an ally of the Western "fight against communism," is also a source of national pride with serious misgivings about sales of Indonesian assets to foreign interests even if it's under a market oriented "privitization" program.

1999     Non-performing Bank Loans and the Bank Bali Scandal: The drop in NPLs (non-performing loans) in may/jun '99 shown in the graph below occurred when loans were transferrd to the IBRA. The ADB (Asian Development Bank) reported that NPLs as a percent of total loans was 33% as of 17mar00. Contrary to the chart on the right from Bank Indonesia, the Dow Jones Newswire reports Indonesia has transferred the majority of its bad loans to the Indonesian Bank Restructuring Agency. Prior to doing so, Indonesia's NPL ratio stood at an estimated 75%. With over a third of bank loans listed as non-performing in 1999, the cost of recapitalizing Indonesian banks has been estimated at $90bn, about two-thirds of Indonesia's GDP. More recently, the Financial Times 31oct01 reported that Asia's failure to tackle bad debts has enfeebled its national banking systems and risks depressing growth for years, according to Ernst & Young, the professional services firm. Bad loans total $2,000bn across the region and in Indonesia's case are estimated at 60 per cent of total bank loans, the firm says in a forthcoming report. As a solution the transitional (may98-oct99) government of Habbie tried to get foreign banks to invest in undercapitalized domestic banks. Standard Charter Bank of London considered a 20% stake in Bank Bali until it was discovered that $70 or $80mil of bank funds had been fraudently used. This finding was associated with Habbie and was a reason his candidacy for the presidency failed. And it led the IMF in August '99 to withdraw loan dispersals until an outside audit was completed.

Oct 99 Formation of the Wahid-Megawati government:
After the May 1998 riots, Megawati Sukarnoputri became the candidate favored to head a new government. Indonesia's first-ever election was held in June 1999, Megawatai's PDI-P party won but the Indonesian parliament went against the election and, on Oct 20, 1999, voted 373 to 313 to install Abdurrahman Wahid as the new president. Within hours violence and despair broke out in the capital because the Parliament did not confer the presidency to Megawati. With 70 out of 200 million people in poverty and pent up emotions from 32 years of human rights violations from Suharto's internal security forces, Megawati's following derives from the fact it was her father, Sukarno, who was deposed by the military coup that led to the Suharto regime. In response to the public outcry over Magawati not being given the presidency, Megawati was, on October 21, the day after the oubreak of violence, given the vice-presidency. Despite the anti-IMF position of some members of her PDI-P party, Megawati has sought more foreign credit. Outside the building where Megawati spoke (01feb00) to donors about the complexity of the corruption problem, "anti-debt protesters rallied to demand that the donors reject Indonesia's request for more loans, saying that they impoverished the people".

Although President Wahid has said he will pardon the elderly Suharto if he is convicted of wrong doing, Suharto has nevertheless been placed under "city arrest" to keep him from leaving the country. More liable for prosecution are family members.

May '98 Subsidy Removal and Riots:
The IMF pressure to remove subsidies on fuel and electricity was either smart or a blunder. depending upon one's view of whether the West wanted to overthrow Suharto. The argument that it was intentional can be found by Thai columnist Nitiphum Nawart. A view that it was a major blunder is given by Ted Grant and Alan Woods. In any case Suharto was forced to resign May 21. The riots were initiated by an IMF insistence that subsidies be reduced on gas and kerosine despite the argument that more "than 60 percent of the rural population relies on kerosene for heat and light" -- a view that Jakarta believes but the IMF denied. This is a repeat of the same policy applied to another oil-exporting country, Venezuela in 1989, that led to hundreds of deaths . Michael Camdessus was IMF Managing Director in both '89 and '98. In response to the 1989 riots and deaths he stated the policy (of requiring domestic gasoline prices to match world prices) was "well conceived."

According to the US Department of Energy, about 75% of Indonesian businesses were in "technical bankruptcy" following the collapse in 1998.

Dec '97 Sovereign Debt Rating:
In late December '97 Moody's debt rating service downgraded Indonesian soverign debt from investment grade -- it received "junk" status. This caused a large sell-off since many financial managers are not allowed to hold non-investment grade debt.

Oct/Nov '97 Closing of Commercial Banks :
The former president of Bank Indonesia, J. Soedradjad Djiwandono, gives considerable emphasis to the the closing of 16 commercial banks on Nov 1, 1997. In his view the closures were initially well received by foreign investors, but "... domestically the closing of banks was badly received. It even caused further loss of confidence in the banking system. However, when some political intervention by the government was suspected on the execution of bank closures, the foreign market started to react negatively also." Writing in the Harvard Asia Pacific Review a year later, Steven Radelet also argued that the condition for a Nov 1 IMF loan, that 16 commercial banks be closed, was "ill-conceived" and worsened the panic. Rather than reconstructing the firehouse during a fire (Alan Blinder's metaphor), the IMF reversed itself in Jan 98 and agreed with the Indonesian authorities to extend full guarantees for all bank depositors and creditors. At the same date, 1nov97, the IBRA was formed.

Background: Suharto:

The Indonesian military and the "disappeared" compared to Argentina's military and the "disappeared" May 1998 efforts to suppress dissension Photos of his last month in power It required a thousand+ deaths to get Suharto out of power but it required a a half million deaths to remove the left-leaning Sukarno in 1965 which led to Suharto's rule. The reason for the difference is that Sukarno, a central figure in the Non-Aligned Movement, was (1965) very popular and Suharto was (1998) widely hated. The 1965 change in power was from the top via a military coup whereas the 1998 power shift began with the Asian crisis, a low price ($10-$12 in 1998) for Indonesia's oil exports, IMF conditions, student protests and rioters from the slums.

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