Succession and stability key issues for Indonesia

Succession and stability key issues for Indonesia

HONG KONG (Reuters): President Soeharto's rule over Indonesia, a guarantee of stability for more than three decades, is increasingly being viewed as part of the economy's problem rather than the solution, analysts here said.

In the wake of the country's near economic collapse, the lack of a successor to the 76-year-old patriarch and concern over whether he will go quietly when the time comes are worrying Jakarta markets like never before.

"Soeharto, for the first time in his presidency, appears weak," said Christopher Wood, Asian and emerging markets strategist for Peregrine.

Soeharto has won credit for engineering economic growth in an impoverished nation while forging cohesion among Indonesia's huge population of 200 million people scattered across a vast archipelago.

These achievements are widely acknowledged in Asia, despite Western objections to the former army general's sometimes brutal rule.

But many now doubt whether the strengths that have served Soeharto so well in the past are appropriate to the new challenges faced by Indonesia.

The greater financial transparency and free-market competition required as part of the US$43 billion aid package agreed upon with the International Monetary Fund (IMF) will be painful for Soeharto to swallow.

Leadership will be required to implement the revised economic plan laid down by the IMF, says Marshall Mays, chief strategist at Nikko Securities.

"There are lots of loose bits and pieces that paint a good picture but no one is compiling a coherent plan," he said.

There have been drastic revisions to Jakarta's budget tabled last week, and promises of an end to lucrative monopolies held by Soeharto's friends and relatives.

These and other pledges have helped to shore up investor confidence, but most fund managers want to see concrete evidence of economic reform and liquidations of non-performing businesses before buying back into the country.

"We haven't seen major companies go bankrupt although the currency's fallen 70 percent. Why not? They've got to go bankrupt. It makes you wonder whether they're being propped up behind the scenes," John Seel, sovereign analyst at Bear Stearns said.

Banking sector reform giving regulators the ability to shut down rotten banks, and bankruptcy legislation allowing the liquidation of indebted firms were needed to begin the shakeout process, analysts said.

Whether Soeharto is up to the task is a big question for foreign investors.

"You can play these markets now with five big stocks," one head trader said. "Nobody cares about them any more."

Terence Mahoney, managing director at TCW Asia, said the weak rupiah reflected the increased social and political risk premium associated with an unstable regime.

"Major concessions have been made by Soeharto, but we still have an election coming up, we don't know who his successor will be, and unlike Thailand and Korea where you really seem to have public support (for reform) there still seems to be a lot of friction in Indonesia," he said.

Peregrine's Chris Wood said Indonesia required a change in leadership, just as South Korea did before foreign confidence was restored. The key, he said, was for Soeharto to leave peacefully.

"If he does, I think there's every chance for a successful transition. If he doesn't, we've got a problem."

But others said the politics had been overplayed.

Try Sutrisno was Vice President under Indonesia's constitution, which clearly designated him as Soeharto's successor, said Jake van der Kamp, strategist at ABN Amro Hoare Govett.