< http://www.feer.com > INDONESIA WHAT NEEDS TO BE DONE THE INDONESIAN ECONOMY NEEDS MORE THAN JUST A NEW CABINET By Sadanand Dhume Issue cover-dated August 23, 2001 The stockmarket may have cheered and the rupiah may have strengthened to an 11-month high, but it will take more than announcing a new cabinet to put Indonesia's battered economy back on the rails. With world oil prices down from last year's highs and growth sluggish in Indonesia's two biggest export markets--Japan and the United States--GDP growth is expected to slow to an anaemic 3%. Meanwhile, political turmoil and a lack of institutions have ensured that Indonesia continues to haemorrhage money. Credit Suisse First Boston estimates that last year net capital outflows topped $9 billion. In an interview with the REVIEW, new economic tsar Dorodjatun Kuntjoro-Jakti says his immediate goal is to set Indonesia's economy right before the next general elections, scheduled for 2004. His priorities: addressing government debt, which at about $154 billion is more than Indonesia's GDP; creating employment for millions; and dealing with the economic effects of decentralization. These challenges, daunting at the best of times, are set against the backdrop of the world's fourth-most populous country's unruly transition from dictatorship to democracy. Fortunately for Dorodjatun, the near term offers more modest targets. Indonesia must jump through three hoops: restoring a $5 billion IMF-led lending programme; persuading the Paris Club group of rich donors to roll over debt; and winning fresh support from the Consultative Group of Indonesia, a group of bilateral and institutional donors. On the domestic front, the 2002 budget must be presented to parliament in October. Repairing relations with the IMF will be the new government's top priority, says Emil Salim, an economics minister under President Suharto and one of Megawati's advisers. Since December last year, the fund has denied Indonesia a $400 million loan tranche and the nod of approval that goes with it. Both the Paris Club and the CGI look for the fund's seal of good housekeeping for reassurance that Indonesia's economy is on the mend. The IMF's intransigence is likely to end. Japan has long been pressing it to ease its pressure on Jakarta--especially regarding politically charged issues such as asset sales by the Indonesian Bank Restructuring Agency. Now it looks as if the United States may be willing to let up as well. On August 10, U.S. Trade Representative Robert Zoellick made an unplanned stopover in Jakarta from New Delhi to assure President Megawati of American support for her government. An IMF delegation led by the outgoing deputy director for Asia-Pacific, Anoop Singh, is expected in Jakarta later this month. According to a draft version of a new letter of intent negotiated between the IMF and the outgoing Wahid government--and seen by the REVIEW--the IMF appears ready to scale back its demands in Indonesia. The draft agreement contains only 37 clauses, as opposed to 67 in the one signed with the Indonesian government in September last year. It retains existing commitments by the Indonesian government, such as the continuing sale of a 40% stake in Bank Central Asia, once the country's largest private retail bank. But new language dwells on achieving broad principles--such as greater transparency at Ibra--rather than specific targets. The change in focus is partly a reaction to widespread criticism of the IMF's penchant for micromanagement. It's also a symbolic retreat in the face of more pressing brush fires in Argentina and Turkey. For its part, the new Indonesian economic team is likely to have a less prickly relationship with the fund than its predecessor. Wahid's finance minister, Rizal Ramli, delighted in taking potshots at the IMF. By contrast, Dorodjatun describes the IMF's attitude toward Indonesia as "very positive." Laksamana Sukardi, whose State Enterprises Ministry will now look after Ibra, is much more likely to be sympathetic toward the IMF's calls for greater transparency in Ibra's dealings with powerful debtors. But even a honeymoon with the IMF won't be enough to rid Indonesia of all its headaches. Mari Pangestu, a top economist at Jakarta's Centre for Strategic and International Studies, points out that some of the issues facing the new economic team--such as a breakdown in law and order--are beyond its control. A weak legal system that makes lending risky and deters foreign investors is another problem that won't disappear overnight. Pangestu says the biggest medium-term challenges for the government lie in bank and corporate-debt restructuring and asset sales. As a result of a massive bank bailout during the Asian Crisis, Ibra controls assets estimated at $50 billion, about a third of Indonesia's GDP. To get rid of them, the agency must navigate its way past powerful former owners, many still running the companies pledged to Ibra, and through a young parliament eager to interfere in the minutiae of the sales. Pangestu says it is important that the new president back policymakers when they make "the painful decisions that are necessary." James Castle, president of the American Chamber of Commerce in Jakarta, says foreigners will respond to sales by Ibra by "knocking down the doors." After Indonesia's long drought without any good news, he isn't the only one feeling a little optimistic. "We have already hit the bottom," says Salim. "The only way now is up."
