Reform hopes fade in Indonesia
DENPASAR - Indonesian President Susilo Bambang Yudhoyono's political gamble to widen his coalition and govern by broad consensus is backfiring just months after his re-election, posing serious questions about the future efficiency and cohesion of his already scandal-tainted government, including simmering controversy over his previous administration's rescue last year of a mid-sized bank.
Soon after his landslide victory in July, Yudhoyono worked hard to broaden his coalition in parliament. He took risks to assemble a government that rewarded with cabinet posts and other plum position the political parties that had supported him during the campaign as well as those that came around after the poll result.
The politicking notably led to political powerhouse Golkar joining the government soon after Aburizal Bakrie, a controversial former senior minister and businessman, took the reins of the party in October. In the lead-up to the July election, Golkar had campaigned against Yudhoyono in its pursuit of the presidency, but it was nonetheless rewarded with four ministries in the new government.
Yudhoyono's calculation also led to former state secretary Hatta Rajasa, a senior politician with the moderate Islamic party PAN who had served as transport minister in the previous government, receiving the coveted post of coordinating minister for the economy, despite accusations Rajasa's past performance had been lackluster. Several other trades-offs contributed to a government line-up that is a clear mix of reformers and conservatives, technocrats and political appointees, and secularists and Islamists.
The mix was devised as a boost for the president's agenda in parliament, which includes economic and financial reforms aimed at easing the way for more foreign participation in the economy. He was also expected to push for badly needed reforms of the bureaucracy, security apparatus and state-owned enterprises.
However, this was when Yudhoyono was negotiating from a position of strength after his resounding election win. His hand has since been weakened with scandals related to official attempts to undermine the Anti-Corruption Commission (KPK) and questions over the integrity of a state bailout last year for a financially troubled mid-sized bank.
Golkar and to a lesser extent PAN have surprised some analysts by joining the opposition in attacking the government over indications of mismanagement and potential fraud in the previous government's handling of the 6.7 trillion rupiah (US$716 million) rescue of Bank Century, a perennially troubled financial institution that teetered towards insolvency last year.
As early as 2005, Bank Indonesia, the country's central bank, required Bank Century's managers to put funds in a special escrow account as a guarantee against the non-performing assets on its balance sheet. By the time the authorities realized last year that the bank was having difficulty obtaining inter-bank loans, Bank Century had lost a significant proportion of its deposits.
As the global financial crisis started to hit, Bank Century's capital adequacy ratio plummeted from 18% in September 2008 to minus 2.3% by November 2008, raising government fears of potential systemic risk to the financial sector. A government short-term fund injection of 689 billion rupiah did little to stabilize the capital-depleted bank.
A few days later, the Coordination Committee, a board comprised of Bank of Indonesia and the Ministry of Finance executives, declared Bank Century "a failed bank with systemic impacts". Officials believed at the time that its closure could have affected confidence in all Indonesian banks, presenting the risk of a calamitous chain reaction. A further injection of 632 billion rupiah was authorized and later increased to 6.7 trillion rupiah.
The additional capital injections were not publicly revealed until August 2009, when the parliament's Finance Commission demanded an audit of the bailout. The Supreme Audit Agency later reported "unhealthy practices" in the funds disbursements, but it failed to say who were among the final beneficiaries of the capital infusions.
Suspicions started circulating that the money went to well-connected depositors, and from there trickled down to the coffers of political parties, including Yudhoyono's Democrat Party. The president has strongly denied it and called for total transparency in the ongoing investigations. But the risk is rising that the inquiry becomes politicized as Yudhoyono's allies and enemies sense political weakness.
The parliament unanimously agreed in early December to establish a special committee comprised of 30 coalition and opposition politicians to launch a formal enquiry, led by the Golkar Party, into the alleged tainted cash flows. It will be tasked with investigating the case for two months and has already turned its attention towards who had the authority in assessing Bank Century as a "failed bank with systemic impacts".
The probe into the case started on Wednesday, with the summoning of the leadership of the Supreme Audit Agency, and has already taken hard aim at Finance Minister Sri Mulyani Indrawati and Vice President Boediono, the central bank governor when the bailout was authorized. Both are widely perceived as reformers pushing for greater liberalization of the economy.
Indrawati has clashed directly with the Golkar Party's Bakrie, whose wide-ranging business interests have flourished under a system of patronage and grew robustly while he was a minister in Yudhoyono's previous government before suffering losses wrought by the global financial crisis. She has accused the Golkar Party of turning the probe into a witch-hunt against her. Golkar member Idrus Marham, who chairs the House special committee investigating the bailout, has asked her not to confuse personal matters with the investigation.
The now open conflict between the top two ruling coalition members raises concerns about the government's future stability. There has been speculation that Yudhoyono insisted Mulyani visit Bakrie to clear the air, but it's unclear if such a meeting took place. It's clear to most analysts that the two political heavyweights share different perceptions about the government's role in economic affairs, underlining the tension between reformers and conservatives in Yudhoyono's coalition.
Whether that tension undermines future policy-making is an open question. The tussle over Bank Century is likely the first in a series of conflicts that will pit competing special interests and political loyalties inside the coalition. Yudhoyono thus has some tough choices to make to maintain stability and control of parliament. The Bank Century case has already distracted the government from policymaking, undermining his fast track promises made on the campaign trail.
That distraction was also seen as one reason for heavy foreign selling on the Jakarta Stock Exchange on Tuesday and the overall decline in average trading volumes over the past two weeks. To be sure, many investors have taken a wait and see position, but earlier hopes that Yudhoyono's could push quickly reforms are fast fading.
Fabio Scarpello is the Southeast Asia correspondent for Adnkronos International. He may be contacted at fscarpello@gmail.com
Soon after his landslide victory in July, Yudhoyono worked hard to broaden his coalition in parliament. He took risks to assemble a government that rewarded with cabinet posts and other plum position the political parties that had supported him during the campaign as well as those that came around after the poll result.
The politicking notably led to political powerhouse Golkar joining the government soon after Aburizal Bakrie, a controversial former senior minister and businessman, took the reins of the party in October. In the lead-up to the July election, Golkar had campaigned against Yudhoyono in its pursuit of the presidency, but it was nonetheless rewarded with four ministries in the new government.
Yudhoyono's calculation also led to former state secretary Hatta Rajasa, a senior politician with the moderate Islamic party PAN who had served as transport minister in the previous government, receiving the coveted post of coordinating minister for the economy, despite accusations Rajasa's past performance had been lackluster. Several other trades-offs contributed to a government line-up that is a clear mix of reformers and conservatives, technocrats and political appointees, and secularists and Islamists.
The mix was devised as a boost for the president's agenda in parliament, which includes economic and financial reforms aimed at easing the way for more foreign participation in the economy. He was also expected to push for badly needed reforms of the bureaucracy, security apparatus and state-owned enterprises.
However, this was when Yudhoyono was negotiating from a position of strength after his resounding election win. His hand has since been weakened with scandals related to official attempts to undermine the Anti-Corruption Commission (KPK) and questions over the integrity of a state bailout last year for a financially troubled mid-sized bank.
Golkar and to a lesser extent PAN have surprised some analysts by joining the opposition in attacking the government over indications of mismanagement and potential fraud in the previous government's handling of the 6.7 trillion rupiah (US$716 million) rescue of Bank Century, a perennially troubled financial institution that teetered towards insolvency last year.
As early as 2005, Bank Indonesia, the country's central bank, required Bank Century's managers to put funds in a special escrow account as a guarantee against the non-performing assets on its balance sheet. By the time the authorities realized last year that the bank was having difficulty obtaining inter-bank loans, Bank Century had lost a significant proportion of its deposits.
As the global financial crisis started to hit, Bank Century's capital adequacy ratio plummeted from 18% in September 2008 to minus 2.3% by November 2008, raising government fears of potential systemic risk to the financial sector. A government short-term fund injection of 689 billion rupiah did little to stabilize the capital-depleted bank.
A few days later, the Coordination Committee, a board comprised of Bank of Indonesia and the Ministry of Finance executives, declared Bank Century "a failed bank with systemic impacts". Officials believed at the time that its closure could have affected confidence in all Indonesian banks, presenting the risk of a calamitous chain reaction. A further injection of 632 billion rupiah was authorized and later increased to 6.7 trillion rupiah.
The additional capital injections were not publicly revealed until August 2009, when the parliament's Finance Commission demanded an audit of the bailout. The Supreme Audit Agency later reported "unhealthy practices" in the funds disbursements, but it failed to say who were among the final beneficiaries of the capital infusions.
Suspicions started circulating that the money went to well-connected depositors, and from there trickled down to the coffers of political parties, including Yudhoyono's Democrat Party. The president has strongly denied it and called for total transparency in the ongoing investigations. But the risk is rising that the inquiry becomes politicized as Yudhoyono's allies and enemies sense political weakness.
The parliament unanimously agreed in early December to establish a special committee comprised of 30 coalition and opposition politicians to launch a formal enquiry, led by the Golkar Party, into the alleged tainted cash flows. It will be tasked with investigating the case for two months and has already turned its attention towards who had the authority in assessing Bank Century as a "failed bank with systemic impacts".
The probe into the case started on Wednesday, with the summoning of the leadership of the Supreme Audit Agency, and has already taken hard aim at Finance Minister Sri Mulyani Indrawati and Vice President Boediono, the central bank governor when the bailout was authorized. Both are widely perceived as reformers pushing for greater liberalization of the economy.
Indrawati has clashed directly with the Golkar Party's Bakrie, whose wide-ranging business interests have flourished under a system of patronage and grew robustly while he was a minister in Yudhoyono's previous government before suffering losses wrought by the global financial crisis. She has accused the Golkar Party of turning the probe into a witch-hunt against her. Golkar member Idrus Marham, who chairs the House special committee investigating the bailout, has asked her not to confuse personal matters with the investigation.
The now open conflict between the top two ruling coalition members raises concerns about the government's future stability. There has been speculation that Yudhoyono insisted Mulyani visit Bakrie to clear the air, but it's unclear if such a meeting took place. It's clear to most analysts that the two political heavyweights share different perceptions about the government's role in economic affairs, underlining the tension between reformers and conservatives in Yudhoyono's coalition.
Whether that tension undermines future policy-making is an open question. The tussle over Bank Century is likely the first in a series of conflicts that will pit competing special interests and political loyalties inside the coalition. Yudhoyono thus has some tough choices to make to maintain stability and control of parliament. The Bank Century case has already distracted the government from policymaking, undermining his fast track promises made on the campaign trail.
That distraction was also seen as one reason for heavy foreign selling on the Jakarta Stock Exchange on Tuesday and the overall decline in average trading volumes over the past two weeks. To be sure, many investors have taken a wait and see position, but earlier hopes that Yudhoyono's could push quickly reforms are fast fading.
Fabio Scarpello is the Southeast Asia correspondent for Adnkronos International. He may be contacted at fscarpello@gmail.com