Indonesia: Mixed Messages

1998

Dr Hal Hill

As President B.J. Habibie approaches his first 100 days at the helm, it is possible to offer an early assessment of his presidency. Arguably he has performed better than most people expected. There is now greater freedom of speech and association, the press is less onerously controlled, and the army's arbitrary and sometimes brutal actions are now subject to some scrutiny. But this new-found political euphoria is occurring against a backdrop of an increasingly desperate economic situation. The economy will contract by at least 15% this year, and probably more. Inflation is headed for 100%, and with it the very real risk of hyper-inflation. The inevitable consequences are rising poverty, malnutrition, crime, and social and ethnic tension. There are, it is true, some moderately encouraging economic signs. The international donor group has provided sufficient funding to support the government's ballooning fiscal deficit, which is projected to be 8.5% of GDP in the current fiscal year. Non-oil exports seem to be holding up quite well, although exporters are evidently holding most of the proceeds abroad. Late rains and a highly competitive exchange rate are boosting the rural economy, such that some of the poorer regions of the country are not suffering too badly. Domestic Chinese capital is also flowing into those regions - Bali, North Sulawesi - not traditionally troubled by sharp ethnic divides between the pribumi (indigenous) and Chinese communities. But apart from these few signs, it is hard to find any encouraging economic news. Much of the problem lies in the government's apparent incapacity to chart a clear way forward out of the current mess. Although the three key economic Ministers are highly regarded, the government as a whole gives the impression of policy incoherence and paralysis. Dr. Habibie's own political ambitions, from care-taker leader to presidential aspirant, has complicated the situation. Fiscal policy lacks coherence, as many of the subsidies which are driving the huge deficit have little to do with equity or helping the poor. Of great concern too is the re-emergence of some of the President's pet projects, including special tax treatment for the island of Batam, and the Java-Sumatra bridge. The restructuring of the banking system is moving extremely slowly, while trade policy and privatization are other key areas of slippage. Of central importance are the government's mixed messages to the Chinese business community. If the government is unwilling or unable to send a clear and unambiguous signal to its dominant commercial community that its members remain welcome in their own country, and that their personal and business interests will be protected, it is hard to see how recovery can take place. The regional environment is also much less favourable than it was even a few months, with the result that Indonesia can expect less support from its neighbours. Perhaps most disturbing of all, there seems to be a widespread assumption in Indonesia that economic recovery will have to await the establishment of new political institutions and the workings of newly created political processes. Indonesia will not have an effectively functioning Cabinet until March 2000 as a result of these processes, and in any case it will almost certainly be a shaky coalition regime.  

WATCHPOINT: Indonesia can ill afford to put hard decisions on hold during this most dire crisis in the nation's history.

 

About our company:

AFG Venture Group is an Asia and Australia based corporate advisory and consulting firm with over 20 years experience in creating alliances, relationships and transactions in Australia, South East Asia and India; including a 15 year history of corporate and equities advisory in Australia, undertaking merger, acquisition, divestment, fund raising and consulting for private and public companies.

Go to top