Indonesia: From uncertainty to certainty

Indonesia: From uncertainty to certainty

By Mar'ie Muhammad

The following article is based on a paper presented on Oct. 1,
1999, at the Asia Society in New York.

NEW YORK: Indonesia is now confronting a multifaceted crisis.
For 30 years Indonesia was under the command of one president
acting as a strong man. Now Indonesia is socially highly
fragmented. In this environment, unfortunately we do not have an
effective national leadership, and even I might say that we are
facing a national leadership crisis. This is true in the case of
the human tragedies and crimes in East Timor that happened after
the announcement of the result of the ballot. I am certain that
what happened in East Timor was completely self-destructive for
Indonesia's image in a global context and that the tragedy was
out of the central government's control. This statement is
offered as an honest statement and is not apologetic.

Indonesia should admit the dark side of its actions, not only
in East Timor, but also in other parts of the country, such as
the events that have taken place in Aceh. For these tragedies,
Indonesia should take necessary actions to demonstrate to the
world that we belong to a civilized nation and society. We should
investigate and commit to trial people who are responsible and
involved in these crimes against humanity.

The government's decision to provide an independence option to
the East Timorese was a complete breakthrough in the new era of
the East Timorese people. Now, it has become an international
obligation to restore peace and order to East Timor, and to speed
up it's transition process into an independent state.

Meanwhile, ethnic conflict, in some areas accompanied by
religious intolerance, has occurred in many places.
Simultaneously, separatist sentiments outside East Timor, such as
in Aceh, also happen to be associated with the ethno-nationalist
phenomena.

Because the spread of corruption happened in almost all
segments of the public sector, the government lost its
credibility, and additionally it led to a lack of trust in the
society as a whole. Bad governance also happened in the corporate
sector. The Bank Bali scandal clearly demonstrated a perfect
collusion for bad governance between public officials and the
corporate sector. In this regard, the Bank Bali scandal should be
disclosed in a transparent manner based on a full investigative
report. Those found to be involved in the scandal should be
committed to strand trial in an impartial court.

During this month, we do expect that a new president will be
elected smoothly. The new government, which will be fully
legitimate with broad political support, will soon hit the
screens.

From the above observations, we can conclude that Indonesia is
confronted with too many uncertainties, and that it is now the
challenge for Indonesia, in collaboration with the international
community, is to convert these uncertainties and even enigmas to
certainties.

In doing business, it is too difficult to assess the risks if
the investor is confronted with too many uncertainties.
Simultaneously, we are now in the process of recovering
democratization as a part of political reforms.

In this regard, I would like to urge the international
community to contribute positively to the process of
democratization through empowering the political institution and
civil society.

Let me now begin by highlighting some remarks on the focus of
our discussion today concerning financial and corporate sector
restructuring. The crisis left a costly economic legacy that will
be with us for many years to come. This will create a severe
strain on government finances caused by a devastated,
dysfunctional banking sector and a depleted indebted corporate
sector.

The severe conditions of the banking and corporate sector
include the following:

* High levels of corporate borrowings, usually short-term and
in unhedged foreign currencies.

* Poor banking practices and supervision, which resulted in
the misallocation and, more gravely, misappropriation of funds,
balance sheet mismatches and insufficient provisioning.

* Pervasive corruption, collusion and nepotism.

* Perhaps, least recognized of all, fundamental changes in the
global financial system, which rewarded Indonesia handsomely for
many years but, just as easily, punished the country during our
time of crisis.

As a result, the banking sector recapitalization is very
costly and totals approximately Rp 550 trillion or about US$70
billion. If one compares this with other countries in the region,
the recapitalization cost in Indonesia in percentage to GDP is
the highest -- about 50 percent -- whereas in Thailand, Malaysia
and Korea the recapitalization cost is only 17 percent to GDP.
The huge amount of funds needed for the recapitalization of banks
will put substantial pressure on the Indonesian budget, and this
means a burden for the public. Concerning corporate
restructuring, corporate governance, including transparency, is
highly important. The key issues for moving forward on corporate
governance are straightforward:

* Fairness: protecting the interests of minority stockholders
from fraud, self-dealing and other irregularities.

* Transparency: improving disclosure of company performance
information accurately and on a timely basis.

* Accountability: creating an effective control system based
on the distribution of power among the board of directors,
managers, shareholders and auditors.

* Responsibility: responding to the stakeholders and the
environment in which the corporation exists.
The key challenges of corporate debt restructuring in Indonesia
include the following:

* Indonesia's bankruptcy laws are weak compared to other Asian
countries.

* Recent failures on the part of the courts to declare debtors
bankrupt.

* Many Indonesian debtors lack transparency -- they are
unwilling to disclose information to third parties.

* Many of Indonesia's largest corporate debtors are affiliated
with political power holders.

* The willingness of debtors to come to the table and
negotiate in good faith.

* With the banking sector still unwilling to lend and debt
restructuring still in progress, many companies face substantial
working capital shortfalls.

It is well understood that corporate restructuring is a very
complex process. And for Indonesia it is becoming more complex
because there is a conflict of interest arising from ownership
concentration. In addition, the judicial system and the
bankruptcy law are not yet posing a credible threat. Despite
these shortcomings, corporate restructuring has shown some
progress.

I believe that the period between now and when the new
government takes office is a time for taking stock, a time to
analyze and weigh economic strategies and to finish drawing the
road map for sustained medium and long-term growth. Given our
resource-base and our human and physical capital, our capacity to
rebound is great. What we need is a good political climate -- and
that is democracy -- sound development with the implementation of
economic and social policies, and support from the international
community.

Certainly there are hopeful signs for the Indonesian economy,
which has been battered over the past two years. However, such
hopes are highly dependent on the political situation in the
country.

Whatever the next government will look like, and whoever will
lead Indonesia into the millennium, they will have a nearly
impossible task of reviving the real economy. At the same time
they must strengthen the banking and financial sector, unite the
fragmented sectors of the society and fulfill the aspirations of
the Indonesian people who have put so much hope in the new
government. Dwelling only on our past mistakes and holding
grudges against each other will only hinder our country's
progress and may endanger our still fragile democracy. Indeed,
the government must regain the trust of its citizens so that
together we can be true partners for reform. The state and civil
society have to join hands in healing the wounds brought about by
the past regime. This is a long and continuous struggle, and we
appreciate the support and encouragement of our friends and
neighbors, who are also our partners in building a stronger
foundation for a better future.

Mar'ie Muhammad is a former finance minister and a founder of
the private Indonesian Transparency Society.