Saturday, October 31, 1998

Financial meltdown in Thailand exposes fragility of Indonesia

Andreas Harsono
The Nation

JAKARTA , 31 Oct. 1997 - Four months ago people in the world's fourth most populous nation were still absorbed in attending jam-packed housing exhibitions and taking out loans to buy new homes as Thailand was draining its national reserves in an ill-fated attempt to save its currency.

In just 45 days, all of that has changed. Today, Indonesians are guarding their diminishing assets and hoping a regional financial crisis that began when speculators battered the Thai and Indonesian currencies will soon come to an end. That hope, though, is growing dimmer as the crisis continues to spread.

Government officials, optimistic as usual, said Indonesia would not be affected by the regional crisis that resulted when the Thai government permitted the baht to float on July 2 and, despite some misgivings, people continued to consume expensive imported goods and brandish their credit cards, convinced that Indonesia's economic fundamentals were stronger than those of Thailand.

Indonesia's total debt-to-GDP ratio was 109.5 per cent, considerably lower than Thailand's 197.9 per cent, and its current account deficit as a percentage of GDP was 3.4 per cent compared with an alarming 8.9 per cent for the Thai economy.

On top of that, some 20 years of constant economic growth averaging about 7 per cent a year and careful attention to the advice of the World Bank, whose Jakarta office is the second largest after its headquarters in Washington DC, had created a strong impression that President Suharto was right when he declared the Indonesian "miracle" to be underway.

Confident of the economy's resilience, officials continued to convince people not to worry as their Thai neighbours started to lose thousands of jobs, abandon construction sites and even cut up their credit cards.

Indonesia's foreign debt stands at about US$110 billion, about $65 billion of which is in private hands. Short-term debt was estimated at about $25 billion, considerably less than Thailand's estimated $45 billion.

Yet speculators did not buy the government line and soon attacked the rupiah and other regional currencies, including the Malaysian ringgit. Bank Indonesia, the central bank, continued channelling greenbacks into the market to stabilise the battered currency.

In addition to the speculators, who include Hungarian-born financier George Soros, Indonesia's huge conglomerates bought more dollars to pay their overdue foreign loans. Slowly, Bank Indonesia's foreign reserves, estimated at $20 billion, began to be drained of hard currency and the government became alarmed.

For most of the public, the first real shock came when Indonesian Finance Minister Mar'ie Muhammad and Bank Indonesia Governor Sudradjad Djiwandono announced on Aug 14 that the Indonesian government had decided to float the rupiah just as Thailand floated the baht.

Within a month and a half following the baht's de facto devaluation, everything had changed in Jakarta. The rupiah plunged from around Rp3,400 to the dollar to more than Rp4,000 in mid-September. There were no more statements about the rupiah being stronger than the baht.

Bank Indonesia also made a number of other decisions aimed at keeping the remaining dollars in Indonesia.

Indonesia's economic free-fall is now seen as a case of free markets exposing the weaknesses of the country's basic economy.

Indonesia watcher David Jenkins of the Sidney Morning Herald called Bank Indonesia's attempts to stabilise the currency "largely cosmetic", and other analysts predicted that sooner or later, just like Thailand, Indonesia would seek the International Monetary Fund's help.

Unlike democratic Thailand, though, where elections are heatedly contested, Indonesia is suffering from a serious image problem. It has a reputation for extensive corruption and wholesale cronyism.

Perhaps more troubling to Western countries, it is probably best known for its abysmal human rights record.

In neighbouring Asean countries such as Singapore, the Philippines and Thailand, business executives and government officials know they cannot place major investments in Indonesia without involving Suharto's children, whose business activities range from infrastructure to media, from operating satellites to managing taxis.

Not surprisingly, there is fear among foreign investors about the political stability of a country led by an ageing president with no obvious successor.

The 77-year old Suharto, who is widely expected to win a seventh five- year term in office in March, decided on Oct 8 that his administration should seek help from the Washington-based IMF to help restore confidence in Indonesia.

Four IMF bankers arrived in Jakarta the following week and have since been involved in negotiations on a $2 billion bailout. IMF Asia-Pacific director Hubert Neiss, one of the architects that shaped the IMF bailout of Thailand, also met with Suharto to discuss the new credit line.

The negotiations, like those for a $1 billion IMF credit line in July to the Philippines and the $17.2 billion international bailout for Thailand in August, are using accelerated rules drawn up after Mexico sought help in 1995.

Experts said Indonesia's high foreign exchange reserve might encourage the IMF to offer a smaller package, yet concern that a large package would be needed to reassure jumpy markets could point to a larger deal.

The IMF is expected to pressure the Indonesian government to scrap monopolies on staple products such as soyabean, cooking oil and flour, but not sugar or rice. Analysts also said the international institution is to ask the under-performing banking sector to be closed or merged as well as for subsidised petrol and diesel prices to be increased.

It is unlikely that Indonesia's controversial car project, for which exclusive tax and tariff concessions have been granted to presidential son Hutomo "Tommy" Mandala Putra, will be scrapped.

Suharto, however, has received more help than embattled Thai Prime Minister Chavalit Yongchaiyudh. Singapore agreed to lend as much as $10 billion, while Malaysia is prepared to channel $1 billion in addition to Japan's offer of unspecified financial assistance.

The assistance of both Singapore and Malaysia is based on bilateral agreements, although both countries support the IMF package. Yet analysts reacted with disbelief to Suharto's remarks that Singapore had offered the $10 billion in help.

"It's incredible. I'm surprised by the sum of money. $10 billion dollars is more than expected, even though we know Singapore can well afford it," a Singapore-based economist said.

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