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.