Analyst says Indonesian outlook bleak

Analyst says Indonesian outlook bleak

HONG KONG (Reuters): Indonesia faces a troubled future of social and political uncertainty and part of the blame belongs to the International Monetary Fund, an expert on the country said yesterday.

Eugene Galbraith, group head of research for ABN Amro and an Indonesia resident for 16 years, said risks to stability were likely to come from the country's periphery, rather than from Jakarta, which was more firmly under the control of internal security forces.

"Jakarta is the whole focus of internal security, so Jakarta is controllable. But there are opportunities for unrest at the margin (of the country), which the government could not address concurrently," Galbraith said in an address.

He predicted the "worst is yet to come," anticipating further unrest when fuel subsidies are lifted on April 1.

Riots have broken out and looting has been rampant in some parts of Indonesia as disgruntled residents have taken to the streets to voice despair over rising prices of basic goods.

Shops of ethnic Chinese have been targeted by the looters.

Galbraith said it was worrying that the government had not come out more strongly against the violence aimed at Chinese.

What was most disturbing was that President Soeharto had not proclaimed that "Indonesians of Chinese descent are Indonesians, which has sent a signal that they are fair game," he said.

Galbraith said he believed the selection of controversial Research and Technology Minister B.J. Habibie as Soeharto's vice president in the next administration implied there were divisions in the military.

He said Habibie had angered the military in the past because of his control of industries supplying military goods such as planes, ships and guns. The military nevertheless gave Habibie its official backing last week.

"If the army is divided, then my view of the future is much more cautious," he said.

Galbraith placed a large share of the blame for Indonesia's woes on the IMF, which he said had handled the situation badly. While the IMF's prescriptions to steady the staggering Indonesian economy were "uncontroversial," its way of dealing with the country's leaders undermined their authority and failed to recognize political realities, Galbraith said.

Galbraith described the IMF as "petulant" in its early dealings with the country over the Asian financial crisis.

On the topic of the currency board "the way the IMF dealt with Indonesia was disgraceful. Giving an ultimatum to a sovereign nation does not create a fertile environment for good political dialogue," said Galbraith.

In mid-February, the IMF threatened to cut off bailout funds for Indonesia if the government carried through plans to fix the rupiah through a currency board system.

The international agency later softened its stance, saying a currency board was premature but could be considered in future after Indonesia carried out financial reforms.

Galbraith acknowledged that the failure of a currency board system would wreak havoc on Indonesia's financial markets.

But he said the country may have little choice but to give a currency board a try, now that its banking system was in tatters, the central bank was failing to offer leadership and the rupiah "moves 10 percent in a day."