Indonesia Economy Facing Possible ‘Disintegration’

Indonesia’s ravaged economy is sliding further into disarray thanks to a demoralized populace, a paralyzed banking system and corruption that is expected to worsen in the run-up to June’s parliamentary elections, Indonesian experts warn.

Larry Jensen, chief economic consular officer at the U.S. Embassy in Jakarta, and Edward Masters, a former U.S. ambassador and president of the United States-Indonesia Society, predict more volatility in the coming months with the potential for “economic and social disintegration” if the June elections, and this fall’s presidential selection, do not go smoothly.

Once considered one of Asia’s economic miracles, Indonesia was clobbered by the 1997 financial collapse that depressed its stock and currency values to as much as 80% below pre-crisis levels and sparked a political backlash that led to the ouster of former President Suharto after 32 years in power.

Although Indonesia’s stock and currency markets began stabilizing late last year, the incidents of lawlessness and ethnic and religious clashes have increased sharply.

Against this backdrop, Asia’s hardest-hit economy remains extremely vulnerable to any shocks that would undermine a recovery, according to the two Indonesia experts.

“Recovery needs to wait for at least another year of living dangerously,” Masters told executives attending the recent Asia/Pacific Business Outlook conference held at USC.

Indonesians are so disheartened and worried about the future that they have “lost interest in business” and are closing their factories and selling off their inventories, according to Jensen. Cash-strapped factories are operating at 50% of capacity and construction has ground to a halt.

Reform is slow. Only 120 of the country’s 2,000 largest debt-plagued firms have even developed restructuring plans, and a handful have actually begun selling off assets and repaying creditors, according to Jensen. Efforts to privatize lucrative government operations such as Indosat, the telecommunications firm, have foundered in the face of stiff resistance.

Under pressure from the International Monetary Fund, the Indonesian government last month finally closed 38 insolvent banks and nationalized seven other large banks. The IMF, criticized for its harsh fiscal medicine, then agreed to give the struggling government an additional $1 billion in funds on top of its initial pledge of $43 billion.

Given the political uncertainty, mid-level government bureaucrats are afraid to make decisions and some have stepped up efforts to line their pockets.

“I’m told that instead of giving you a cup of coffee and then asking you for something, they meet you at the door with their request,” Jensen said. “I’ve had firms say they won’t do business in Indonesia anymore.”

U.S. firms involved in large infrastructure projects in Indonesia are also nervously watching the government’s investigation into allegations that Suharto helped his family and friends accumulate billions of dollars in ill-gotten wealth.

Freeport McMoRan, the Louisiana mining giant, and California-based Mission Energy are among the foreign firms whose contracts with Suharto family members or friends have come under government scrutiny. The firms deny any allegations of wrongdoing.

Masters expressed confidence that Indonesia’s leaders will continue to welcome foreign firms in spite of the Suharto backlash and nationalist rhetoric that has intensified since the financial crisis hit.

But the longtime U.S. diplomat said Indonesia’s recovery depends on President B.J. Habibie taking a stronger stand against the persecution of the ethnic Chinese, thousands of whom fled the country with their wealth after becoming the target of violent riots that preceded Suharto’s ouster.

“Indonesia cannot operate without the Chinese,” he said. “The pribumis [native Indonesians] are not going to be in a position financially or technically to lead this recovery.”