New Government in Indonesia Lacks Credibility as Well as Cash

Investors and business leaders weren’t exactly rushing back to Jakarta in the wake of President Suharto’s resignation Thursday. They are convinced that great uncertainty lies ahead in what will be a long, painful road to recovery for a nation teetering near bankruptcy.

Executives and analysts in temporary exile here worried that the promotion of former Indonesian Vice President B.J. Habibie, a Suharto protege, will only momentarily defuse the political tensions that erupted in violence last week.

“This is not going to change anything,” said J.K. Han, executive director of Maspion Group, an ethnic-Chinese-owned conglomerate based in Surabaya, Indonesia’s second-largest city. “This will just buy time.”

Until the new Indonesian government’s political credibility is established, foreign firms will be hesitant to move their executives back to Jakarta and risk having them caught up in another round of violence. Most multinationals and foreign governments hastily evacuated their expatriate staff and families to Singapore over the weekend.

And aside from a few companies chasing giant infrastructure projects in Indonesia, foreign investors are likely to hold back until it is clear that political reform has taken hold.

“I certainly wouldn’t be moving back there soon,” said Nick Marshall, director of research at Santander Investment Securities Singapore.

“I would need to see that the students are genuinely satisfied with the process of reorganizing the government and the new government is dealing with the private-sector debt.”

The chief concern is whether Habibie, a German-trained aerospace engineer who championed controversial projects to build a national airplane and automobile, has the popular support or political will to implement the tough reforms necessary to get the Indonesian economy back on track.

That means tackling corruption, reining in the banks and dismantling the lucrative monopolies that have enriched Suharto’s extended family and close friends. That could hit close to home since the new president and his family reportedly control at least 80 Indonesian firms.

“Habibie will have a hard time trying to convince the markets and the Indonesian people that he will be a credible leader,” said Andy Tan, general manager of MMS, a financial analysis arm of Standard & Poor’s.

Tan and other analysts here predict Habibie will be forced out of office before his term ends in 2003, adding to the uncertainty in an economy headed into its worst recession in three decades.

“I see at least one more change of leadership before Indonesia is on the road to recovery,” said Jason McCay, chief of Indonesia research at Deutsche Morgan Grenfell in Singapore.

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Not everyone shares that pessimism. James Castle, head of the Castle Group, said the outgoing president, Indonesian opposition leaders and the military deserve accolades for engineering a transfer of power that avoided more bloodshed and created a mechanism for change.

“People say Habibie is a Suharto man and [military leader] Gen. Wiranto is a Suharto man,” said Castle, a prominent Jakarta business consultant. “I think they’re Indonesian men and they want what’s best for Indonesia. Let’s give this new government a chance to move forward.”

In his first speech Thursday night, Habibie sought to quell uncertainty over his policies and pledged to continue the reform process in order to “restore economic life.”

Habibie will need all the help he can get, given the daunting economic challenges that lie ahead. That means persuading the backbone of the Indonesian economy--the ethnic Chinese--to return from the countries where they sought refuge after their homes and businesses became targets for angry mobs seeking vengeance or a quick rupiah.

The ethnic Chinese, who make up less than 4% of Indonesia’s population but control an estimated 70% of its private wealth, are no strangers to economic scapegoating during times of political or economic strife.

But last week’s attacks, which destroyed much of Jakarta’s Chinatown, were the worst outbreaks of violence since Suharto took power in 1965.

“Something very important was taken away from all of us on Black Thursday,” said one young Indonesian manager who fled with his family to Singapore on Monday after his brother’s home was torched and looted. “Now, if you walk down the street or you drive alone, you are scared. Indonesia has changed.”

Corporate Indonesia is still tallying the damage.

Many companies in and around Jakarta remain closed and factories have shut down their production lines.

Hundreds of bank branches and ATM machines were destroyed. The destruction of an estimated 60% of the small shops in the capital city has made it difficult for people to get food and basic supplies.

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Habibie must also win over the International Monetary Fund, which organized a $43-billion support package last fall after the Southeast Asian financial crisis sent Indonesia’s currency and stock markets into a free fall.

The Suharto regime’s failure to meet earlier commitments to implement tough economic reforms forced the IMF back to the negotiating table three times. Now, a $1-billion disbursement slated to be delivered in June has been put on hold until IMF analysts evacuated over the weekend can return to Indonesia and assess the situation.

The World Bank has also held back a multibillion-dollar loan for further review.

Indonesian manufacturers flourished during the 1980s and ‘90s thanks to low-cost foreign capital and a seemingly insatiable global appetite for low-cost apparel and electronic goods.

But the nearly 80% decline in the value of the rupiah over the past year has left most Indonesian companies effectively bankrupt, unable to repay debts that have ballooned in rupiah terms. Although these manufacturers have become much more competitive internationally thanks to the rupiah’s crash, they are unable to get bank credit to purchase raw materials or pay for imports.

Until the country is able to renegotiate an estimated $80 billion in foreign debt--at least $30 billion of it owed by local Indonesian firms--foreign lenders will be unwilling to turn the spigot back on, according to bankers and analysts.

* TRANSFER OF POWER

The Habibie regime, greeted with indifference by the populace, is seen as temporary. A1