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From: Self <LION/PHUAKL>
To: phuakl@sit.edu.my
Subject: (Fwd) [sangkancil] Political & Economic Risk on Indonesia (fwd
Date: Sat, 8 Nov 1997 09:02:52
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To: sangkancil@malaysia.net
Cc: sk@malaysia.net
Date: Sat, 08 Nov 1997 06:54:09
Subject: [sangkancil] Political & Economic Risk on Indonesia (fwd)
From: pillai@mgg.pc.my (M.G.G. Pillai)
Reply-to: pillai@mgg.pc.my (M.G.G. Pillai)
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From: normx@hotmail.com (Observer)
Date: 07 Nov 97
Originally Posted On: soc.culture.indonesia
--_í_--------------------------------------------------------
Country Risk Report: Indonesia
Last updated: November 4, 1997. If you would like to subscribe to our
service so that you receive our latest analysis immediately upon
publication, go to our order form now. Click here for a description of the
publications we offer and subscription details.
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Executive Summary: Indonesia
* Indonesia has negotiated seriously with the IMF over the
recently-announced financial package and, unlike Thailand, can be
expected to keep its side of the bargain. Although the projects of
many well-connected companies have been saved for now, it is entirely
possible that President Suharto will agree to further economic reforms
that impinge upon the interests of the presidentÆs inner circle if
this proves to be really necessary to maintain IMF support.
* Watch out for a shakeout in the banking sector. The government will
probably provide vigorous support for the larger banks (which are
generally in better shape) while allowing banks which are experiencing
more serious difficulties to either close or merge with larger ones.
The 16 banks which have already been singled out for closure may not
be the last. Just as important as the banks being closed is that the
government is sending out a clear signal that well-connected people
will not be spared. The shareholders of PT Bank Andromeda, for
example, include the son of President Suharto, while PT Bank Industri
is part-owned by the brother-in-law of Bank Indonesia Governor
Soedradjad Djiwandono, as well as by Mr. Suharto's daughter.
PT Bank Jakarta is owned by President Suharto's half-brother,
Probosutedjo. Over the medium term, projects associated with Research
and Technology Minister Habibie are also likely to get the axe as
part of wider confidence building measures.
* Recent warnings by senior military leaders that the armed forces will
not tolerate any attempt to disturb the general session of the
PeopleÆs Consultative Assembly next March suggest that the government
may be preparing to crack down on some of the more prominent
non-governmental organizations whose influence has grown rapidly over
the last few years. However, senior ministers with economic portfolios
in the Cabinet can be expected to oppose such moves vigorously in the
coming weeks on the grounds that they would produce more negative
international publicity at a time when the restoration of private
sector confidence is critical.
* After a lull of several months, social tension is set to rise once
again as the economy feels the combined effects of the drought and
the financial crisis. Higher food prices and a possible run on ailing
banks could lead to serious anti-Chinese riots. Strikes in support of
demands for higher wages are also possible. However, none of this will
have a significant impact on political stability.
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Near-Term Outlook: Indonesia
Fighting to retain investor and creditor confidence:-
Cabinet technocrats won an important battle in early October when they
convinced President Suharto to look into the possibility of seeking
long-term support funds from the IMF. The significance of the move can
be exaggerated, however, raising unrealistic expectations. In the coming
months, IMF involvement will be seen by many in the private sector as
heralding an official willingness to accept the sort of economic medicine
the country has needed for a long time.
Expectations now are that the IMF will put muscle behind demands for a
clean-up of the banking system and an end to the monopolies and special
privileges which still characterize the Indonesian economy. However, it is
far from certain that this will actually be the case, or if it is, whether
the governmentÆs response will be fast enough to prevent the situation
getting worse. Unlike the circumstances which prompted the IMF bailout of
Thailand, Indonesia is not desperate û at least not yet. The decision to
invite the IMF was aimed more at restoring confidence and macro-economic
stability than it was a signal that President Suharto was at last willing
to disband the countryÆs remaining monopolies or abandon his support for
controversial projects such as the aerospace and national car programs.
One of the lessons that has frequently been drawn from the economic crisis
of the mid-1980s is that while Indonesia may muddle along during normal
times, it still retains the ability to react decisively in economic crises,
abandoning long-standing protectionist policies in favor of reformist moves
designed to stimulate the economy and lure foreign investors. On the
surface, this appears to have been borne out by the way the government has
reacted to the financial crisis so far this year. Cabinet technocrats have
seen their bargaining power vastly improved, and a series of announcements
from Jakarta have suggested that the stagnating economic reform program is
about to be reinvigorated.
However, there is a very important difference between the current situation
and that of the mid-1980s. Whereas the main losers in the economic reforms
triggered by the previous economic crisis were government-run monopolies û
a fairly easy target û cabinet technocrats now have an influential lobby of
well-connected companies and individuals to contend with. The most
important of these are run by various members of the presidential family,
although there is also a small group of ethnic Chinese with powerful and
well-protected business interests who have the presidentÆs ear as well.
Added to this are economic nationalists such as Research and Technology
Minister Habibie and National Development Minister Ginandjar Kartasasmita
who also have their own pet projects to defend. In the mid-1980s, many such
companies and individuals could actually profit from the reform process by
being handed licenses and being invited to form joint ventures with foreign
partners to compete against inefficient government monopolies. Thus, they
could present themselves as part of the deregulation process rather than
as a drag on economic reform. This is no longer the case, however, and the
sort of reforms likely to be demanded by the IMF and its allies in the
Cabinet in the coming months could prove very painful for a wide range of
well-connected individuals. Judging from the way even banks in which even
President Suharto's children have been closed if their financial situation
was considered to be too weak, the government is not going to offer blanket
protection to people from the "inner circle," which should help to keep the
confidence of foreign creditors.
JakartaÆs initial reaction to the currency crisis was certainly
commendable, and did much to re-assure nervous investors that, when push
comes to shove, the government can be relied upon to act appropriately. By
floating the rupiah in mid-August, Cabinet technocrats such as Finance
Minister Marie Muhammad and Central Bank Governor Sudradjad Djwandono
showed themselves willing to learn from the Thai example and avoid an
unwinnable battle against foreign speculators. As a result, Indonesia still
has about US$20 billion in foreign exchange reserves (equivalent to about
five months of imports) that may now be used to help stabilize the currency
at much lower levels. New deregulation measures such as allowing foreigners
to own up to 49% of the shares of listed companies were also fairly
painless, given the parlous state of the stock market and the desperate
search for liquidity.
Other announcements which appeared equally positive at first glance, also
turn out on closer examination to be less forceful. A prime example was the
decision in mid-September to shelve a large number of costly projects. The
fact is that most of the projects that were postponed were not scheduled to
begin for some time anyway. For example, state-owned utility PT Perusahaan
Listrik Negara had signed 28 power purchase agreements with private power
companies to generate over 10,500 MWs of electricity by the turn of the
century. At the time that the dramatic announcement was made that major
projects were to be delayed, only six of them had secured financing from
local and foreign banks. Announcing the postponement of 14 power projects
(worth US$5 billion) and a review of the nine others (worth US$4.9 billion)
thus revealed more about the political impotence of Cabinet technocrats
than their ability to kick-start an appropriate national response to the
currency crisis. It was a similar story in the case of toll roads, with
most projects associated with PT Citra Marga, the listed toll-road company
run by the presidentÆs daughter, reportedly unaffected on the grounds that
the finance had already been obtained. Tellingly, several large projects
by well-connected companies funded with high interest debts were given the
green light, while other projects financed by low-interest loans under the
umbrella of the Consultative Group on Indonesia (creditor consortium) were
rescheduled. To some extent, the announcement did suggest that the
government regarded the currency crisis as serious and was trying to do
something about it. Unfortunately, the impact was blunted several days
later when several ministers suggested that projects marked for
postponement or re-evaluation could go ahead after all.
Several of the big ticket projects still slated to go ahead symbolize
exactly what is wrong with the Indonesian economy. They include Tommy
SuhartoÆs national car project (made possible by massive tax concessions
To a company with little experience in automobile manufacture and no local
production facilities), Research and Development Minister HabibieÆs
expensive N-250 aircraft development project and plans by Tutut, the
presidentÆs daughter, to build a US$2.3 billion triple decker toll road and
mass transit railway in Jakarta. These projects could yet be axed, however.
Mr. Habibie's projects, in particular, are vulnerable. The government might
was for a ruling by the WTO to decide the fate of the car project. So much
"face" is involved with this project that Mr. Suharto will be very
reluctant to let it go. Depending on how the financial crisis unfolds now
that the government has announced tough action with respect to weaker
banks, more concession might yet be made, the car project among them,
although would be done only if Mr. Suharto perceives there is no
alternative.
Attempts to shore up international confidence by announcing additional
deregulation packages also appear to have run into difficulty. In August,
Coordinating Minister for Economy and Finance Saleh Afiff announced that
the government intended to scrap the monopoly given to the National
Logistics Agency (Bulog) to import certain imported commodities such as
sugar and wheat. At the start of November, this reform was carried out,
when the government moved to stip Bulog of its status as the sole importer
of wheat, wheat flour, soybeans and garlic, from January 1. This move could
hit the Salim Group hard, since it has an effective monopoly on flour
milling as a result of its agreement with Bulog to supply the company with
wheat. Bulog is unlikely to surrender it import monopoly on rice, however.
The forest fires which still rage out of control in Sumatra and Kalimantan
may not have quite the same financial impact, but they do illustrate the
extent to which vested interests can combine with bureaucratic inertia to
frustrate policy implementation. The official response to the fires was
slow, and when it did come, was largely as a result of diplomatic pressure
from Malaysia and Singapore, which were blanketed in a dense and choking
haze. On September 9, when President Suharto announced an indefinite ban
on the clearing of land by fire, some firms actually stepped up the burning
so that they could meet their business targets. A later announcement by the
forestry ministry that it was revoking the licenses of companies believed
to be responsible for the fires had little impact, most of the subsequent
improvement coming instead from light rain and favorable winds. Similar
inaction followed Environment Minister SarwonoÆs announcement on September
17 that the government had decided to evacuate 50,000 residents from
Rengat, a city in the Riau province where smoke levels were especially
hazardous. The ministerÆs complaints about military foot dragging and lack
of cooperation from other ministries in fighting the fires also apparently
fell on deaf ears. Led by Bob Hasan, a close associate of Suharto,
IndonesiaÆs forestry lobby has worked to play down the significance of the
fires, which have damaged agriculture, driven away tourists and angered
IndonesiaÆs neighbors.
Indonesia is in a better macroeconomic position than Thailand before its
financial meltdown, but many of the symptoms of economic malaise are very
similar. These include the large dollar-denominated foreign debt held by
the private sector, a shaky banking system and the general inability of
the government to overcome the resistance of vested interests to economic
reform. Fortunately, the Indonesian property sector appears better placed
than that of Thailand to ride out the storm, the current account deficit
as a percentage of GDP is only about half that of Thailand, and Cabinet
technocrats have been moving in the right direction, even if they are
facing strong resistance.
The coming months could also see a rise in of social unrest. Consumer
Price inflation is already up, with official figures (which probably
underestimate the extent of the problem) checking in at an annual rate
of 7.1% in September, up from 5.7% in August. The problem is not merely
confined to higher prices for imported goods as a result of the weakened
rupiah. The current drought will reduce agricultural production, forcing
food prices to surge anyway and obliging the government to spend precious
foreign exchange importing additional supplies of rice. The more immediate
concern, however, is the possibility that there may be a run on one or more
of the nationÆs ailing banks. From this, it is only a short step to further
anti-Chinese riots. Significantly higher inflation could also trigger labor
disputes by workers demanding higher wages. Faced with such a possibility,
the government will be reluctant to take other painful restructuring
measures such as a cut in fuel subsidies that could push inflation up even
further.
The good news is that such social unrest is unlikely to be accompanied by
political instability of the sort witnessed in Thailand over the last few
months. Suharto is almost certain to be re-elected president at the
PeopleÆs Consultative Assembly (MPR) in March. The only political issue of
any real significance facing the nation is the identity of the person he
will select to serve as his vice-president for his next five-year term.
This is an important matter since it bears on the looming political
transition. Suharto is into his 70s and it is entirely possible that his
nominee could succeed him in the nationÆs top job should he die suddenly or
become incapacitated in the next few years. However, this is probably not
the issue that most businessmen should be focusing on over the next few
months. Of much greater importance is the extent to which the government is
able to respond appropriately to the environmental and financial crises now
gripping the country. These matters will be effectively decided well before
the MPR session, and they will certainly be far more important in setting
the tone for medium term economic growth than any decisions made by a body
whose carefully selected membership is set to follow a script laid out well
in advance by the nationÆs real power holders.
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Economic Indicators: Indonesia
1991 1992 1993 1994 1995 1996e 1997f
Real GDP Growth(%) 6.62 6.10 7.25 7.48 8.20 7.80 6.00
Total Exports
(fob, US$ bil) 29.29 33.97 36.82 40.05 45.42 49.50 52.50
Total Imports
(cif US$ bil) 25.87 27.28 28.33 31.99 40.62 44.40 45.10
Current Account Balance
(US$ bil) -4.08 -3.70 -2.11 -2.79 -7.50 -8.90 -9.00
Foreign Exchange Reserves
(US$ bil) 9.15 10.18 10.99 11.82 13.31 17.82 18.00
Total Outstanding Foreign Debt
(US$ bil) 79.78 88.30 89.48 96.50 100.00 110.00 115.00
Debt Servicing
(US$ bil) 11.46 12.58 14.27 14.79 15.59 16.30 17.10
Exchange Rate vs US$
(year-end) 1,992 2,062 2,110 2,200 2,308 2,361 3,900
Inflation
(CPI %) 9.24 5.00 9.70 8.50 8.60 6.60 7.80
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