Please Select an Item
Economic and Political Review of Selected Asian
COUNTRY REPORT - INDONESIA
Prepared for "Asia and Pacific Review 2001"
Indonesia's fourth President since independence in 1949, survived his first full year in office in 2000 - just. President Abdurrahman Wahid has always seemed something of a transitional figure. He is frail from one or more strokes and almost blind. His was elected through a non-transparent electoral college process with a multiplicity of candidates. He was only third in the popular vote receiving a mere 13 percent - the largest bloc of the popular vote went to his Vice President Megawati Sukarnoputri, herself the daughter of modern Indonesia's first President. In effect, President Wahid was everyone's second choice, pending the development of a greater national consensus.
Wahid succeeded the erratic, appointed President B. J. Habibie just as East Timor became the first part of modern Indonesia to claim successfully its independence after a bloody uprising. The combination of the movement towards greater democracy, a weakened military and the successful East Timor breakaway, fanned other similar movements across the republic. The uprising in the oil rich province of Aceh in Sumatra is strong and persistent. So is the uprising in Irian Jaya, which now prefers to call itself West Papua, reflecting the ethnicity of its indigenous peoples and their similarity with their Papua New Guinea neighbours. Sectarian violence between Christians and Muslims occurred with great regularity in 2000 in the Malukus. It has also spread to Kalimantan where the struggle has been between natives to the region and immigrants from Java.
To some outsiders, the Indonesia that President Wahid rules may appear to be developing many unfortunate parallels with post-Tito Yugoslavia. The difference is that President Wahid is no tyrannical Slobodan Miloslevic. Whilst the head of the largest Muslim grouping in the country, he is secular and mystic by nature and is reluctant to rule with an iron fist. The Government he heads seems leaderless more often than not. He has been accused of corruption but such accusations, justified or not, appear part of the stock-in-trade as the press liberalises in developing countries. In turn, he has been erratic, firing Cabinet ministers at will and allowing an astonishing situation to develop at the Bank of Indonesia where the Governor has been accused of corruption in a case separate from his BoI duties. The Governor has refused to step down and Wahid has been unable to confirm an effective Governor, leaving this important institution to drift at a critical time for the economy.
Wahid has, however, been able, so far, to mobilise his popular base in the streets to avoid the several attempts to depose him through votes of no confidence in the Congress. Traditional Javanese deference to position could be part of the reluctance of the Congress to move. However, more can probably be attributed to a fear of the precedent setting nature of removing a President from office and the question about what would be the nature of any successor Government i.e., would it become the tool of the military again or lead to greater community upheaval?
Indeed, the role of the military in the Government is still far from settled. Whilst President Wahid has tried to reduce the military's power and was successful in getting the powerful General Wiranto to leave the cabinet and retire from the Army, it still retains a special place constitutionally in the governing of the country. A general popular resentment against the military was felt in the wake of Suharto's removal. As time goes by, however, and disturbances seem the norm there may be a desire for greater peace and order. However, the military's wings have been clipped by separating the police and the army.
In the event that President Wahid leaves because of ill health, impeachment or resignation, the successor would almost certainly be Vice President Megawati. She is popular with the masses, primarily on account of her name. This has been a common feature of Asian politics in recent years with wives and daughters of former leaders following in their family business of politics. In this regard, her character and background seem somewhat akin to Cory Aquino's by appearing to assume her role reluctantly and out of a sense of obligation. By education she is not well qualified to assume office and so her choice of advisers will be critical.
During 2000, Megawati negotiated increased informal and formal powers over administration matters as well as over civilian and military appointments. The military now support her rather than the President. At present, however, she seems prepared to let events take their course and await the next election, which are due in 2004. She does not have a specific policy agenda markedly different from Wahid's but, as her father's daughter, is likely to be somewhat more nationalistic in outlook.
Restive provinces and decentralisation
Keeping Indonesia intact has been a policy goal of the US and other ASEAN countries. Greater decentralisation, even a federal structure, are seen by many as integral to this process. To quell justified concerns about Javanese imperialism, greater fiscal autonomy was provided for the year starting January 2001 allowing the provinces and local authorities more control over the revenues they collect. (Java, which has been subsidised by the other regions, will be a loser in this process.) However, the legislation was rushed and ill prepared and the World Bank and the IMF have expressed concerns that a lack of qualified personnel at the provincial level may lead to increased malinvestment of resources.
Whilst the process may be economically inefficient, at least in the short run, greater local and regional autonomy, coupled with proper accountability, are essential elements in maintaining order in the longer term.
President Wahid has enjoyed the support of the G7 countries economically and politically, being seen as the best hope for a transition to a democratic Indonesia. The territorial integrity of Indonesia as it is presently constituted is seen as being very much in Western interests. However, relations with its nearest Western neighbour Australia remain cool in the wake of their intervention over East Timor. And relations with the US also cooled when certain high level Indonesians sought the recall of the outspoken US Ambassador.
The US military is keen to re-establish relations with its Indonesian counterparts that were broken over human rights concerns in the wake of the problems in East Timor. This desire to keep Indonesia within the Western orbit can only be increased when President Wahid suggests, in all probability only half seriously, that Indonesia should develop closer military links with Russia, China and India.
In spite of the political shenanigans in Jakarta and the less than adequate peace and order situation in the country, economic growth finally resumed in Indonesia in 2000 after the sharp recession in 1998-9 in which GDP contracted by 13.2 percent. The contraction in Indonesia had been by far the worst performance of the crisis-affected countries. The recovery however, still leaves the economy almost 10 percent lower than pre-crisis levels over three years before and over 25 percent smaller than it would have been had the pre-crisis 7 percent growth been maintained.
The GDP grew in 2000 by about 4 percent on the back of sharply increased commodity export prices, particularly oil and gas. These allowed total exports to grow by almost 25 percent and expand the trade and current account balances by even greater percentages. The trade balance for 2000 was almost USD 27 billion and the current account balance USD 9 billion.
Despite the export surge, domestic consumption grew at a constrained 3 percent, as confidence remained subdued as a result of the low levels of confidence resulting from the recession and the damage done to consumer and corporate balance sheets. The continuing political turmoil did nothing to improve confidence.
Manufacturing production enjoyed a modest rebound growing by 6.4 percent compared with less than 3 percent the previous year and gross fixed investment managed a 10 percent increase, helped by Government investment. Despite the uncertain political environment new FDI investments rose for the first time since the onset of the crisis. Again, this investment was primarily in export areas: oil and gas or labour intensive areas such as garments. The rupiah is now worth only 25 percent of its 1997 levels and even on an inflation adjusted basis Indonesia has gained tremendously in competitiveness terms, provided the political risk perception can be overcome. New domestic investment was, and is likely to remain, restrained.
Despite the modest pick-up in the economy, inflation showed a marked improvement with consumer prices growing by less than 4 percent compared with over 20 percent in 1999.
Agriculture continued a modest recovery from the drought-ridden El Nino years 1997-8 but the uncertain peace and order situation in parts of the country hindered a more dynamic recovery.
Absent a worsening of the security situation, the economy has bottomed and the modest recovery can be expected to continue. Indonesia should be less affected then the rest of the region by the slowdown in the west given the still strong natural resource base of the economy. Electronics and the so-called new economy that are at the core of the US slowdown are much smaller factors here than in other parts of South East Asia, let alone North Asia. With strong oil and gas, metals and palm oil economic growth is expected to be in the 4 to 4.5 percent range.
If the security situation worsens then economic growth will obviously be adversely affected.
The severe decline in the rupiah during 2000 is expected to boost local inflation in 2001 to 7-9 percent, double the previous rate. The trade balance is expected to be remaining in healthy surplus. The current account, whilst still in surplus, may be tightened slightly by debt service requirements.
Fixed investment is also expected to maintain its slightly improved status. However, the banking sector with its very incomplete rehabilitation will restrain the extent of the new investment. This again demonstrates the need for well functioning domestic capital markets.
Debt and the budget
The budget has been severely affected by the crisis and the deficit in 2000 was almost 5 percent of GDP with revenues amounting to only 11 percent GDP. The deficit has been causing both external and domestic debt to mushroom. The Government hopes to increase revenues gradually in 2001 and beyond with increased taxes on property, income and corporate taxes, luxury goods and value added.
However, the concern noted previously about autonomy to the regions could impede progress in this area by reducing revenue growth.
Total indebtedness has grown from USD 52 billion pre-crisis or 23 percent of GDP to an estimated USD 157 billion or 91 percent GDP at the end of 2001. This deterioration is far greater than in the case of the country's other South East Asian neighbours and is driven primarily by the banking sector recapitalisation requirements.
Debt service is limiting budgetary options since debt service requirements absorb 45 percent of tax revenue leaving inadequate amounts for infrastructure or social investment.
Banking and Corporate Restructuring
Placing the economic recovery on a self-sustaining basis requires the reestablishment of peace and order first, and secondly, revitalising the banking and corporate structures bringing corporate governance in line with best practices, in the developing world as a first instance.
The record in this area has been disappointing in the extreme. The agency tasked with cleaning up the nation's banks, IBRA, has had no fewer than five heads in a three-year life. It is tasked with rationalising $ 66 billion in bad assets, approximately 57 percent of GDP. It has sold a princely 3.2 percent of these assets. This compares with 84 percent in the case of Thailand.
The problem is that the agency is caught between two different political agendas. On the one hand the still influential cronies around former President Suharto want to cling to their trophies and, on the other, the reformers want change and a more democratic and accountable ownership of the assets. With a weak agency and a legal system, the result has been equivocation and delay: IBRA is seen as weak and demoralised and the assets are neither restructured nor made economically viable.
The banking system remains weighed down with bad debt despite almost USD 70 billion of capital injections and the corporate system largely unreformed. Indonesia ranked 22nd out of 25 emerging markets economies in terms of the quality of its corporate governance, according to an analysis by CLSA a regional broking firm. Only Thailand scored lower in Asia. At an individual corporate level the story was worse; the same study showed that not one Indonesian company ranked in the top 25 globally, whereas Thailand had two top 25 companies as examples of best practice.
The need for better corporate governance is clearly recognised and those companies operating in the global market place with foreign shareholders, such as Satelindo, are beginning to make some progress.
Nothing perhaps better exemplifies the problem of corporate governance and weak legal and political systems than the case of the Bank of Indonesia, the central bank. The Governor, Mr. Sybarin, was implicated in the Bank Bali scandal before taking office. After he was charged with corruption in this case he refused to stand down, protesting his innocence, and claiming he could not be removed unless convicted because of the Bank's statutory independence. As a result, he is still occupying his office, whilst the Bank is run on a day to day basis by an academic economist, Anwar Nasution. Mr. Nasution is constrained by the peculiarities of his position and indeed many of his holdover deputies have also resigned from the Bank.
The market capitalisation of the Jakarta stock exchange is now only about USD 10-12 billion, about 6 percent of GDP and a fraction of its all-time high. By way of comparison the market capitalisation in the US was about 150 percent of GDP before the NASDAQ declined.
Recovery is obviously hampered by the reluctance of foreign investors to venture again into markets where liquidity is low and transparency and corporate governance is lacking. Rich domestic investors, especially the Chinese, similarly prefer the safety of Singapore bank accounts until the political and security issues are clearer.
The market performed in line with its other regional emerging market cohorts in 2000 losing over 50 percent in USD terms. Values have been created and there are a handful of stocks worth owning by international investors. With easier money in the global markets there could be some investors willing to diversify. The problems faced by the country are of such a magnitude that they are likely to be traders rather than long term investors.
William R. Thomson 10 March 2001
Please Select an Item
Return to Top
Copyright © 2021 Aries Group, Ltd.
Please click here to read our disclaimer.
[About Us] [Services] [Worldwide Projects] [Clients] [Opportunities] [What Is New]
8609 2nd Ave Suite 402B Silver Spring, MD 20910 USA
Ph: 240.247.1300 Fx: 240.247.1301 firstname.lastname@example.org