World

Toughing it out

Pressure mounts on Indonesia's Suharto

TOM FENNELL March 23 1998
World

Toughing it out

Pressure mounts on Indonesia's Suharto

TOM FENNELL March 23 1998

Toughing it out

World

Pressure mounts on Indonesia's Suharto

TOM FENNELL

Only a year ago, the scene would have been unthinkable. To express the seething anger sweeping her country, Aditia, a 22-year-old Jakarta university student, held aloft a giant caricature of Indonesian President Suharto wearing a tilted crown and sitting on a throne atop a sea of U.S. dollars. The bloated image waving above the student demonstration struck at the very heart of the problem afflicting a $ 160-billion bailout that the International Monetary Fund has deployed to keep afloat the near-bankrupt governments of Indonesia, Thailand and South Korea.

While his regional neighbors quickly implemented the IMF dictates, Suharto is resisting reforms that could strip his family and friends of their corporate empires. As he delays, the country threatens to tumble into violence and derail the IMF’s rescue plan. But last week, as all 1,000 hand-picked members of the People’s Consultative Assembly shouted “Agreed!” to anoint the 76-year-old strongman for his seventh five-year term, he showed no sign of softening. “As an individual, some of us may lead an affluent life,” he told the assembly. “But as a nation, we must tighten our belts.”

Suharto’s call for sacrifices while the rich continued to live extravagantly only fuelled the anger of thousands of ^ student demonstrators. Opposition politicians, growing f ever bolder, demanded that audits be conducted on the | president, whose net worth is estimated at more than $20 § billion, and his close friends—many of whom he appointed s to his new cabinet. Suharto was unmoved. He simply assumed new powers to ban demonstrations and outlaw political parties. In a decision that many outsiders took as a defiant message to the IMF, he appointed as his vice-president Bacharuddin Jusuf Habibie, a Germantrained engineer who as technology minister spent massively on megaprojects that the fund wants killed. And on the day of Suharto’s election, no fewer than four of his children chastised the IMF by appealing to Indonesians’ strong sense of nationalism. Said eldest daughter Siti Hardiyanti Rukmana: “If the IMF’s funds sacrifice and degrade our nation’s dignity, we do not want them.”

The growing trouble in Indonesia could not come at a worse time for the region. Bitter economic and fiscal reforms in South Korea and Thailand are beginning to take hold. If chaos paralyzes Indonesia— with 202 million people, the fourth most populous nation in the world—analysts believe there will be a further disastrous run on Asian currencies. Veteran observers are increasingly pessimistic. Robert Broadfoot, managing director of the Hong Kong-based Political and Economic Risk Consultancy, told Maclean’s he expects the country to be engulfed by widespread violence. It has happened be fore. Hundreds of thousands of people died in the bloody wake of a 1965 attempted coup that eventually brought Suharto to power. Those fears, echoed by officials in the region, led IMF managing director Michel Camdessus to take the rare step of criticizing Suharto publicly. Unless he undertakes domestic reforms, said Camdessus, “there is very little that we or anyone else can do for him.”

Far from being chastened, Suharto pressed ahead with a controversial plan to peg the Indonesian currency to the U.S. greenback at the rate of 5,000 rupiah to the dollar. Last week, the exchange was 10,000 rupiah to the dollar. A peg would stabilize the currency for a short period, but IMF officials say that at just $16 billion, Indonesia’s U.S. dollar reserves are too shallow to support the proposed currency board. As a result, speculators would soon drive the rupiah down again and set off another round of devaluations. In the weeks leading up to Suharto’s election, U.S. President Bill Clinton phoned twice to try and talk him out of the currency board and even sent former vicepresident Walter Mondale to Jakarta with the same message.

The IMF, which has agreed to pump $60 billion into Indonesia to help the government meet its debts, also threatened to withhold the latest $4-billion instalment on that money if Suharto went ahead. Later, however, the IMF softened its stance and said it may not entirely oppose the currency peg if other strict reforms are put into place. Broadfoot says IMF officials were worried that the impasse was threatening its entire Asian reform program. The fund will still insist, however, that Suharto collapse many of the family-controlled monopolies and end subsidies to industries. “It was a game of chicken with the IMF,” said Joshua Mendelsohn, chief economist at the Canadian Imperial Bank of Commerce and an expert on the region. “The IMF decided to give in, to get some of the other things it needs.”

The IMF may have also decided that the peg is designed as much for politics as economics. Cynics note that raising the value of the cur-

rency, no matter how briefly, would allow Suharto’s family to move their rupiah to a safe haven at a favorable rate. Many analysts believe Suharto will be eased out of office, perhaps within a year, and replaced either by an army leader or someone else in the ruling elite. Broadfoot doubts he will be toppled in a popular uprising. “In the end,” he says, “Suharto will either leave on his own or be forced out.” Proponents argue that the currency board would stabilize soaring prices, assuming it worked. The political concern is palpable. Street protests are mounting, and analysts believe they will only worsen as jobs disappear and inflation races on. In many towns, looters have attacked shops owned by the Chinese minority, which controls much of the country’s wealth. Some rural peasants have already tried to flee by boat to Malaysia, and officials in neighboring countries fear there could be a refugee surge. Before the crisis began, a stock boy in Jakarta earned about 10,000 rupiah a day, which at the time was worth $7. But last week, the combination of pay cuts and currency devaluations had reduced his pay to the equivalent of just $1.41 a day.

The middle class is also suffering. Abdul Hakim’s family in the West Java town of Bandung owns a Kijang—a popular minivan made by Toyota. But now, he says, “we can’t afford to run it.” Ann Thomson, a Canadian who runs the Indonesian branch of Care Canada in Jakarta, says families now must budget up to 80 per cent more for food. Even foreign business people have trouble keeping up with the constant price increases, says William Burton, vice-president of exploration for International Pursuit Inc., a Toronto-based gold mining company that is drilling in Indonesia. “There are quotas on food and fuel,” says Burton. “Some days, it is difficult to acquire goods because prices are fluctuating by the day.”

The rising uncertainty comes just as other countries in the region are making fragile progress. Unlike Indonesia, Thailand and South Korea have taken such tough steps as letting corporations go bankrupt, changing labor laws to let companies lay off workers and allowing foreign companies to take over domestic firms. “Their cur-

rencies have stabilized,” says Patricia Croft, vice-president and portfolio manager with Sceptre Investment Counsel Ltd. in Toronto, which invests in the region, “but it could be two or three years before economic production comes back.” Last week, citing a need for political unity to rebuild the economy, new South Korean President Kim Dae Jung released 2,300 political prisoners and granted amnesty to 5.5 million Koreans for offences ranging from speeding tickets to visiting North Korea illegally.

Korea, however, remains vulnerable to Jakarta’s troubles, since Korean banks have lent heavily to Indonesian business. China and Japan could also be caught up in the turmoil if it triggers new currency devaluations. China is grappling with its own internal economic problems as it attempts to privatize hundreds of state-owned enterprises. At last week’s National People’s Congress, where economic czar Zhu Rongji took over as prime minister, officials said 3.5 million government workers could be laid off this year. Some analysts fear China might boost demand for its products and ease unemployment by devaluing its currency. Mendelsohn, however; believes Beijing will resist devaluation for at least 18 months. By waiting, he says, China will allow its neighbors to begin a recovery. Adds Mendelsohn: “They don’t want to destabilize the region.”

Japan is even less able to help propel the region out of its collapse. It is heading for its first recession in 23 years, and a widening corruption scandal in its finance ministry last week prompted the fourth suicide of a bureaucrat under investigation in recent months. Yet Japanese Prime Minister Ryutaro Hashimoto left those problems behind and travelled to Jakarta, where he joined the Western chorus urging Suharto to accept the IMF reforms. It is unclear if the enigmatic strongman was listening. But to worried regional leaders, he holds the key to whether Asia emerges from crisis—or is engulfed by a new one.

With JENNY GRANT in Jakarta