ECONOMICS: Indonesia
Far Eastern Economic Review
Oct 8, 1998

Economic Monitor

Indonesia: Room to Manoeuvre

By Salil Tripathi
490 Words

PG    113   

The Indonesian economy is showing tentative signs of stability: The
rupiah has strengthened marginally since the fall of President Suharto
in May, exports are holding up and donors have agreed to roll over
sovereign debt. Endorsing these developments, the International Monetary
Fund released another $940 million last week, bolstering Indonesia's
precarious reserves.

   But the situation remains grim. Credit Suisse First Boston expects
the economy to shrink by 15% this year and another 4% in 1999. Another
bout of social unrest will ruin the prospects of recovery and send the
rupiah into the abyss. And the fear of currency speculators might prompt
greater calls within Indonesia for desperate solutions such as capital

 The rupiah is strengthening for two reasons -- trade and aid. On the
trade front, non-oil exports have held up at close to $4 billion per
month despite the severe economic crunch, according to SG Securities.
The figure reflects a 3.9% drop in exports in U.S.-dollar terms -- an
impressive achievement considering the currency has fallen 80% against
the U.S. dollar since July 1997.

   On the aid front, the international community is helping Indonesia to
fill the gap between its obligations and resources. Indonesia's
short-term (less than 12-month) sovereign and private debt is $37
billion and its reserves are only $14.1 billion, according to ABN Amro
Bank. Keeping that in mind, donor countries agreed in mid-September to
roll over official debt of $4.2 billion for 11-20 years.

   Analysts say these developments will help boost the currency to about
10,000 rupiah per dollar -- the target of both the government and the

   But TV images of one riot can send the rupiah back to the 15,000
level, says a Singapore currency trader. The risk of unrest remains
high, since inflation shows no sign of abating and food shortages hurt
the poor. The consumer price index rose 77.7% in August from a year
earlier, with food prices up 123.4%. Unemployment and poverty remain
pressing problems. The August jobless rate stood at 14.8% -- up from
3.6% in August 1996 -- and the World Bank forecasts a 40% rate by the
end of this year. The three-month Jakarta interbank offered rate is at a
peak of 57.5%.

   Frustration is growing in Indonesia. Under President B.J. Habibie,
Indonesia has been more committed to the IMF programme, but the rupiah
is still 80% off its precrisis level and foreign capital -- both direct
and portfolio -- remains elusive.

   If Indonesia imposes capital controls, the little capital that is
still flowing in will dry up, says Peter Sutton, head of research at
Credit Lyonnais in Jakarta. And the IMF will pack up and leave, which
will halt almost all other aid. Miranda Gultom, a director of the
central Bank Indonesia, told a group of analysts that capital controls
are not under consideration "at the moment." But if the rupiah crashes
in the face of mass civil unrest, Jakarta may find capital controls