Analysts say Soeharto leaves behind appaling economic mess

Analysts say Soeharto leaves behind appaling economic mess

SINGAPORE (Reuters): Indonesian President Soeharto has stepped
down from the helm of a country in its worst economic mess since
the 1960s and the problems can only worsen amid continuing
political uncertainty, analysts said yesterday.

The political earthquake which led to Soeharto's resignation
yesterday has already had a knock-on effect on the economy, with
institutions such as the International Monetary Fund, the World
Bank and the Asian Development Bank putting vital bail-out funds
on hold.

The country's banking sector has all but closed down and
financial markets have shuddered to a halt as violent anti-
Soeharto protests brought Jakarta to a standstill.

"Aside from political reforms the economy is going to be the
one that is much harder to turn around and it's going to get a
whole lot worse before it gets better," said Chiang Yao Chye,
head of Asia Pacific research at CIBC in Singapore.

Even with Soeharto gone, political uncertainty remains and the
market reaction to Vice President Jusuf Habibie taking over was
one of disappointment.

Habibie is a protege of Soeharto and overseas investors are
unlikely to return to Indonesia because of doubts that the
government has really turned over a new leaf.

Soeharto said Habibie would serve until 2003, although
Environment Minister Juwono Sudarsono said the former vice-
president may only be a stop-gap successor.

The general view is that the ship may have changed captains
but it is still heading for an iceberg, although some political
analysts reckon that Habibie's tenure is doomed since he has
little support within the army, the government or amongst the
public.

"He's an interim president. I'd give him a few weeks at best,"
said Bruce Gale, manager of the Political and Economic Risk
Consultancy's Singapore office.

"The odds are just stacked against him."

So with the political picture far from clear economic analysts
say they have no choice but to be bearish.

"The risk that a lot of people seem to be overlooking is that
the economy has fallen so far and so hard," said Andrew Fung,
regional treasury economist at Standard Chartered in Singapore.

Forecasts for this year's gross domestic product (GDP) range
quite widely but center around a contraction of about 7.0 or 8.0
percent, although some are much more pessimistic and said they
would not be surprised to see a double digit fall.

"The risk is to the downside. Before the political situation
blew up there were still people investing in Indonesia, like the
oil companies who were insulated from the currency effect because
their revenues were dollar-denominated," Standard's Fung said.

"But with companies like Conoco (the U.S. energy giant)
pulling their staff out even the most resilient of investments
seem to be falling by the wayside. No one's going to consider
putting new money in there until the political situation clears
up."

Looking further ahead, analysts said Indonesia would be
extremely lucky to see much growth returning next year and more
likely is an economy just about dragging itself out of
contraction.

The 80 percent drop in the value of the rupiah has lit the
fires of inflation and the latest official data for April showed
a year-on-year rate of 44.9 percent.

Some analysts are looking at a hyper-inflation spiral as
future price rises start to be factored in.