Indonesia: A Steadier Course


Associate Professor Howard Dick

In her first six months, President Megawati Sukarnoputri has stabilised the political and economic situation. Huge problems remain but the descent into chaos has been halted and there are encouraging signs of consolidation. This has been achieved despite the worsening world economy and the impact of 11 September 2001.

For 2001 Indonesia’s economic growth rate is likely to be about 3 per cent, well below the 5 per cent achieved in 2000 but better than its ASEAN neighbours, including Singapore.

Other macroeconomic indicators are not so favourable. Having risen sharply on the inauguration of the new government, the exchange rate has slipped back to just over Rp10,000/US$. The world oil price fell sharply after September and is still only $20 per barrel. Inflation is running at an annual rate of over 10 per cent for the first time since the Asian crisis, pushing short-term prime interest rates to 17 per cent.

Nevertheless, the budgetary outcome looks to be better than expected, helped by the recent increase in fuel prices and consequent reduction in subsidies. The Bank Restructuring Agency (IBRA) has met its asset disposal targets and tenders have closed for sale of the initial stake in the formerly Salim-owned Bank Central Asia (BCA).

If growth in money supply can be restrained during 2002 and the oil price continues to improve, the macroeconomic trends should start to run in Indonesia’s favour. Strengthening business confidence may then generate a virtuous cycle.

President Megawati’s steadier hand has already boosted confidence. Politically astute in balancing competing interests and maintaining a fragile coalition, she has also worked much better with Parliament than her erratic predecessor.

The anti-corruption drive has seen some progress with the capture of Tommy Soeharto, the trial of Bustanil Arifin, charges against two directors of Bank Indonesia, and the investigation of Lower House speaker Akbar Tanjung. These proceedings are all highly political and will not reduce the incidence of corruption but may boost the government’s public credibility.

The conflicts in the Outer Islands are unresolved. In Aceh negotiations have all but collapsed, a six-month military campaign has begun and the commander of the Aceh Independence Front, Gerakan Aceh Merdeka (GAM) has been killed.

In Irian Jaya, there is strong evidence that the Special Forces (Kopassus) were involved in the death of Papuan leader Theys Eluays. Only in Maluku does a peace initiative look to have some chance of success. These local conflicts now intersect with a global United States ‘war on terrorism’. Malaysia, Singapore, and the Philippines have all cracked down on alleged terrorists. Over the next few months the pressure will mount on President Megawati to do likewise.

WATCHPOINT: How will Indonesia respond to American pressure to rein in radical Islamic groups with alleged terrorist links? What will be the impact on domestic politics?


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