Uncertainty may persist until fresh polls

The recent resignation of former president Soeharto has provided the country with a respite from months of social unrest. Economist Mari Pangestu from the Centre for Strategic and International Studies discusses the potential for a recovery in business confidence.

Question: Have you seen a recovery in confidence in the business community since President B.J. Habibie came to power on May 21?

Mari: International financial institutions are apparently still doubtful about political stability in Indonesia, particularly after they learned that the current cabinet is regarded as transitional and that it intends to hold a general election once the existing political laws are amended. That means the crisis in confidence is not over yet because some uncertainty still remains.

Foreign investors and employees are also still worried in the aftermath of serious unrest over the past two weeks.

Increasing anticorruption, anticollusion and antinepotism sentiment will mostly affect investors who have close links to former president Soeharto and his family. Hyundai of South Korea, for example, has announced that it will not increase capital invested in an automotive joint venture which is partly controlled by Soeharto's second son Bambang Trihatmodjo.

We can see that the quality of partnerships founded through foreign joint ventures is now being tested. We shall shortly be able to see whether they were established merely because of certain parties close connections to political power, or because of their professionalism.

Indonesian investors who have moved their capital out of the country are waiting for the process of democratization to begin before bringing it back here. Attacks on business facilities owned by the ethnic Chinese have made them feel insecure. The government therefore needs to move to restore business confidence and to reassure the business community that it is safe to live in this country.

Q: To what extent will the government's plan to hold a general election affect business in the country?

M: Bringing forward the general election will accelerate the process of change in the national leadership and will lead to great uncertainty in the economy. Before a general election can take place, the existing political laws will have to be reformed, new mechanisms for holding a general election established, and adequate funds secured.

The Indonesian economy, which has been deteriorating since the monetary crisis began last July, cannot cope with severe business uncertainty for a further six to 12 months, because it is already difficult for the country to reschedule its debts with overseas creditors and to attract foreign investors.

Q: Reform measures to be introduced by the government include bankruptcy and antimonopoly laws. Do you think such laws will help to improve the business environment?

M: The introduction of the bankruptcy law will help, provided that all aspects of it are properly implemented. However, I am doubtful about the implementation of the planned antimonopoly law, the provision for which is included in the reform program agreed with the International Monetary Fund (IMF). The introduction of any such law will be very complicated and we have no institution to support it. Problems will most probably emerge in investigative activities associated with the new law, and this may lead to abuse in its implementation.

Q: To what extent have the recent political tensions affected the country's ability to repay foreign debts?

M: The rupiah's sharp depreciation against the U.S. dollar -- from approximately Rp 7,000 per U.S. dollar to over Rp 11,000 -- following riots in the middle of the month has seriously affected the country's ability to repay foreign debts. It will take a long time to bring the rupiah back down to around Rp 7,000 to the dollar.

As a consequence, Indonesian companies, including state-owned firms, will face difficulty obtaining new loans from foreign creditors.

Because the government has failed to honor foreign debt held by some state-owned companies, foreign creditors are reluctant to issue new loans to state-owned firms.

Foreign importers are worried about possible disruptions to the supply of Indonesian goods and this has affected export- oriented companies here.

Many domestic borrowers, therefore, have no alternative but to sell part of their assets or shares to new investors or foreign creditors if they want to continue operating.

The government, which is having difficulty collecting non-oil related taxes from domestic companies, is also short of funds. The disbursement of new aid from the IMF, the World Bank, the Asian Development Bank (ADB), the Consultative Group on Indonesia (CGI) and bilateral sources will depend heavily on the recovery of political stability and the implementation of the IMF- sponsored economic reform program.

I think the government will also have to look to reschedule part of its foreign debt. It may have to ask for a one year period of grace during which it would be free from payments on debt principles and interest.

Q: How do you expect the economy to develop over the rest of this year?

A: It's gloomy. The economy might contract by between 10 percent and 20 percent, while inflation might reach between 70 percent and 100 percent this year. Unemployment may reach as high as 14 million to 16 million people by the end of the year, while the number of those living below the poverty line may increase to 58 million, as compared to 22.5 million before the economic crisis. (riz)