World

A political meltdown?

Indonesia's financial crisis sparks calls for Suharto's ouster

TOM FENNELL January 26 1998
World

A political meltdown?

Indonesia's financial crisis sparks calls for Suharto's ouster

TOM FENNELL January 26 1998

A political meltdown?

Indonesia's financial crisis sparks calls for Suharto's ouster

TOM FENNELL

JENNY GRANT

World

After the faithful finished praying last week at Jasri Al-Ikhlas mosque in central Jakarta, fiery preacher Abdul Salam began his daily harangue against Indonesia’s wealthy elite. These days, Salam, who uses loudspeakers to ensure that his message reaches the wealthy people living in the plush apartments nearby, is especially angry. The International Monetary Fund has agreed to pump $62 billion into Indonesia to rescue its financial system from collapse. As the plan’s bitter medicine takes effect, prices will rise and the ranks of the unemployed will swell, but Salam is sure the family and cronies of long-ruling President Suharto will continue to prosper. Salam’s outrage is increasingly shared by millions of Indonesians, and there is now a growing and unprecedented clamor for Suharto, 76, to step aside. If he does not, many Indonesians fear, the situation could turn violent. “Muslim people are experiencing poverty,” complained Salam in his address. “What are the rich doing to help?”

Since he seized power in 1965 after hundreds of thousands died in the bloody wake of an abortive military coup, Suharto has ruled the country like a feudal Javanese emperor. The former general and onetime farmer rewarded his friends and family by allowing them to take control of many of the country’s largest corporations. Suharto’s crony capitalism worked far better than the socialism of his predecessor, nationalist Sukarno (many Javanese use only one name). Indonesia rose out of poverty, a thriving middle class emerged and the nation of 202 million people—the world’s fourth most populous—became an engine of Southeast Asia’s economic boom.

But much of that growth was financed with borrowed money that the country can no longer afford to repay. With the currency, the rupiah, last week worth less than half its value a year ago, Suharto’s subjects are growing angry. “All the government’s lies are out in the open,” said Jakarta businessman Lukman Gunawan as he prepared to pray at the Jasri Al-Ikhlas mosque. “The social gap is widening and people don’t believe in the government anymore.” Led by Megawati Sukarnoputri, 50, the democracy-minded daughter of Sukarno, opposition parties are demanding that Suharto retire when his current term ends in March. Suharto is “corrupt,” Megawati said in a hard-hitting speech in which she announced her willingness to replace him. “He is an economic criminal.” There are even rumblings of a split in the military between a pro-Suharto camp and an Islamic element led by younger officers who want him removed.

The stakes in the battle to replace the aging, and at times ailing, strongman are huge. The IMF, the World Bank and the Asian Development Bank have agreed to loan Indonesia, South Korea and Thailand nearly $165 billion to help them meet payments on their foreign debts and on government-backed loans to troubled corporations. If domestic turmoil engulfs Indonesia, the IMF bailout could come unglued, sending stock and currency markets plummeting again. Canada’s total trade with Indonesia is only about $1.2 billion, but the uncertainty in the region has already taken a toll on the Canadian dollar.

World financial markets have bluntly demonstrated that Suharto is no longer in full control of his country. When his latest budget showed that he was dragging his heels on implementing the punishing IMF reforms—evidently because they would mean dismantling some of the massive conglomerates controlled by his family— the Indonesian rupiah lost 30 per cent of its value in little more than a week. U.S. President Bill Clinton phoned Suharto on Jan. 9 and urged him to follow the IMF dictates—which include allowing banks and a number of private companies to go bankrupt. After discussions with IMF managing director Michel Camdessus in Jakarta, Suharto finally agreed to go along. In a nationally televised : address from his residence last week, he said the reforms would

return the country to prosperity. ‘Today is a special day,” he said, appearing vigorous as his voice rose to drown out the sound of two caged fighting cocks in the background. ‘We have signed an agreement that will solve the country’s economic problems.”

The region’s currencies and stock markets stabilized following Suharto’s decision to back the IMF But many analysts wondered how long the calm would last. To Sylvia Ostry, a research fellow at the University of Toronto’s Centre for International Studies, there are constant indications that the depth of the financial crisis across Asia is not fully understood—and is far from over. Last week, for instance, Japanese officials shocked many analysts when they admitted that the nation’s banks were holding $764 billion in bad loans, far higher than previously thought. In Hong Kong, Peregrine Investment Holdings, Asia’s biggest securities trader, went under, in large part due to losses in Indonesia. Its collapse put new selling pressure on the Hong Kong dollar, which has so far maintained its peg to the U.S. greenback. Lurking in the background are fears that China, relatively untouched by the regional crisis, might devalue its yuan to compete with the cheaper neighboring currencies, triggering another damaging round of devaluations.

Even in Indonesia, the IMF plan does not take account of $190 billion that Indonesian corporations owe, primarily to banks in Japan and neighboring Singapore. If the private debt is not renegotiated, numerous lenders could be in trouble. In the final analysis, Ostry said, no one really knows what will happen in Asia over the next year or whether the rescue will even work. “Startling information comes out every day,” she said. “This is likely to get worse—certainly on the political side.” That seems a strong bet in Indonesia. In an effort to head off a political meltdown, Suharto agreed that some of the sweetheart deals enjoyed by his six children would be cancelled, such as tax exemptions for a national car project run by his youngest son, Tommy. The measures were also sure to affect timber baron Bob Hasan, a close Suharto friend who grabbed a major stake last year in what turned out to be a fraudulent gold claim by Bre-X Minerals Ltd. of Calgary. Analysts said the moves to strip Suharto’s children of some of their perks may buy his government some time. “It’s not very significant in monetary terms,” said David Chang, head of research at Jakarta’s Trimegah Securities, “but it’s important for investors to see that the government is not sparing well-connected individuals.”

Yet Suharto’s move to curtail his family’s wealth was too little, too late for many Indonesians. When the rupiah plummeted, panic buying broke out in Jakarta supermarkets. A 42-year-old housewife named Mariana stood in a ten-deep queue, her cart piled high with powdered milk and rice. “I experienced food shortages before 1966 and it reminds me of that now,” she said. At a market stall where he was selling music cassettes, Fidel, 28, said he hoped the dictator would leave soon. “I dreamt last week that Suharto was not the president anymore,” he said. “Now, I feel brave enough to talk about that in the daylight.”

Tensions on the street are expected to increase as more people lose their jobs and the country falls into recession. In the past, ethnic Chinese, who make up four per cent of the population but control much of the wealth, have been blamed for the country’s economic problems—and often attacked. Last week, scattered incidents of food rioting were reported in East Java.

So far, the most vocal opposition to Suharto’s rule has come from Megawati, who also enjoys the support of two of the country’s most powerful Muslim leaders— Amien Rais, who heads the 29-million-member Muhammadiyah, and Abdurrahman Wahid, leader of the 30-million-strong Nahdlatul Ulama. A loose political alliance is developing among the three that has the potential to bring thousands of people into the streets. Rais does not believe Suharto will reshape the government. “He has always been halfhearted in committing himself to economic and political reforms,” said Rais. “I don’t have any confidence that he will suddenly change.” Suharto will be difficult to dislodge. The military leadership is considered solidly behind him, and the People’s Consultative Assembly, which meets in March to formally select the president, is dominated by officers and members of Suharto’s ruling Golkar party. There is little hope that Megawati could swing enough support even to be nominated in the assembly, which is now preparing to rubber-stamp Suharto’s seventh term in office. Nor is there any clear successor within Suharto’s camp. Given his health problems, political analysts will examine closely his choice for vicepresident. So will global financial analysts. For if things go wrong in Indonesia—a nation that has known terrible turmoil in the past— the repercussions will be felt around the world.