COUNTRY REPORT Indonesia 3rd quarter 1998

Transcription

1 COUNTRY REPORT Indonesia 3rd quarter 1998 The Economist Intelligence Unit 15 Regent Street, London SW1Y 4LR United Kingdom

2 The Economist Intelligence Unit The Economist Intelligence Unit is a specialist publisher serving companies establishing and managing operations across national borders. For over 50 years it has been a source of information on business developments, economic and political trends, government regulations and corporate practice worldwide. The EIU delivers its information in four ways: through subscription products ranging from newsletters to annual reference works; through specific research reports, whether for general release or for particular clients; through electronic publishing; and by organising conferences and roundtables. The firm is a member of The Economist Group. London New York Hong Kong The Economist Intelligence Unit The Economist Intelligence Unit The Economist Intelligence Unit 15 Regent Street The Economist Building 25/F, Dah Sing Financial Centre London 111 West 57th Street 108 Gloucester Road SW1Y 4LR New York Wanchai United Kingdom NY 10019, US Hong Kong Tel: (44.171) Tel: (1.212) Tel: (852) Fax: (44.171) Fax: (1.212) /2 Fax: (852) london@eiu.com newyork@eiu.com hongkong@eiu.com Website: Electronic delivery EIU Electronic Publishing New York: Lou Celi or Lisa Hennessey Tel: (1.212) Fax: (1.212) London: Jeremy Eagle Tel: (44.171) Fax: (44.171) This publication is available on the following electronic and other media: Online databases Microfilm FT Profile (UK) NewsEdge Corporation (US) World Microfilms Publications (UK) Tel: (44.171) Tel: (1.781) Tel: (44.171) DIALOG (US) Tel: (1.415) CD-ROM LEXIS-NEXIS (US) The Dialog Corporation (US) Tel: (1.800) SilverPlatter (US) M.A.I.D/Profound (UK) Tel: (44.171) Copyright 1998 The Economist Intelligence Unit Limited. All rights reserved. Neither this publication nor any part of it may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of The Economist Intelligence Unit Limited. All information in this report is verified to the best of the author s and the publisher s ability. However, the EIU does not accept responsibility for any loss arising from reliance on it. ISSN Symbols for tables n/a means not available; means not applicable Printed and distributed by Redhouse Press Ltd, Unit 151, Dartford Trade Park, Dartford, Kent DA1 1QB, UK

3 Indonesia 1 Contents 3 Summary 4 Political structure 5 Economic structure 6 Outlook for Review 10 The political scene 21 Economic policy 24 The economy 28 Sectoral trends 30 Banking and finance 33 Foreign trade and payments 40 Quarterly indicators and trade data List of tables 9 Forecast summary 10 Economic results and forecasts /99 budget assumptions 25 Gross domestic product growth by sector, Staples prices 27 Monetary aggregates, Sertifikat Bank Indonesia (SBI) rates, Newsprint price 30 Commercial banks liquidity position, Apr Estimated non-performing loans at selected banks under IBRA supervision, mid-jun Merchandise trade 35 Balance-of-payments projections 36 Consultative Group on Indonesia (CGI) commitments 37 External debt 38 The capital account 39 Gross foreign assets, Quarterly indicators of economic activity 41 Foreign trade List of figures 10 Gross domestic product 10 Rupiah real exchange rate 27 Interest rates and money supply, Equity prices 38 Regional currency movements

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5 Indonesia 3 August 11th 1998 Summary 3rd quarter 1998 Outlook for : The main political forces will not accelerate Mr Habibie s timetable leading to a presidential election. A stable political solution in which two main political blocs contend for power looks possible, but a less benign outcome cannot be ruled out. The economy will remain in a critical state and GDP will contract over the next two years. Rapid money-supply growth will make inflation difficult to control. There is no prospect of an exportled recovery, but with imports collapsing the current account will be in surplus. The political scene: Mr Habibie has been trying to distance himself from his predecessor, Suharto. His timetable, which culminates in the election of a new president at the end of 1999, has been gaining acceptance. Pro-Habibie forces have captured Golkar. Megawati has begun to regain control of the PDI. The leader of a Muslim organisation, Nahdlatul Ulama, has formed a new party. Another leading Muslim figure, Amien Rais, has launched a non-sectarian party. The armed forces have been undergoing consolidation. The government has failed to provide reassurance to the ethnic Chinese community. Mr Habibie has made some concessions on East Timor, but not on the issue of sovereignty. Separatist sentiment has flared in Irian Jaya. The economy and economic policy: GDP fell by 12.2% year on year in the first half of 1998, and is now officially expected to decline by 13.1% in the full year. Agriculture has been relatively resilient. Poverty has returned to the levels of the mid-1970s. Already about 17% of the workforce is unemployed and the figure is still rising. One-fifth of the population face critical food shortages. Inflation shows no sign of easing. A fourth agreement with the IMF focuses on emergency measures, and in the light of this the government issued another draft budget. For the first time in over 30 years parliament amended the budget. Sectoral trends: The state electricity company, PLN, exemplifies the problems now facing firms that have large dollar-denominated obligations. Airlines and the media have been badly hit. The worst may be over for tourism. Banking and finance: More than 50 banks have come under the supervision of the Indonesian Bank Restructuring Agency. Audits have revealed a worse situation than had previously been reported. The prospects for rescuing ailing banks through mergers, rights issues or foreign participation are bleak. Many quoted companies could be delisted as a result of a bankruptcy law. Foreign trade and payments: Non-oil and gas exports have done better than expected but imports have collapsed. Various trade finance schemes may be in the offing. Extra IMF-sponsored funds, a large increase in aid consortium commitments and some rescheduling of sovereign debt should allow Indonesia to meet its financing requirement. The private debt overhang is worrying. The rupiah shows little sign of strengthening. Editor: Robert Ward All queries: Tel: (44.171) Fax: (44.171)

6 4 Indonesia Political structure Official name Form of government The executive Head of state National elections National government Main political organisations Republic of Indonesia Strong presidential government based on the state ideology of Pancasila The presidency is the highest executive office, with direct legislative powers and authority to appoint cabinet; the president is elected for a five-year term by the People s Consultative Assembly (Majelis Permusyawaratan Rakyat, MPR); the last cabinet reshuffle was on May 22nd 1998 The president, Bacharuddin Jusuf Habibie. The 1,000-member MPR is nominally the highest authority in the state and consists of members of the House of People s Representatives (Dewan Perwakilan Rakyat, DPR) and 500 appointed members; the MPR meets every five years to establish the guidelines of state policy and elect the president and vice-president; the 500-member DPR must approve all laws; 425 members are elected, while 75 representing the armed forces are appointed by the president May 1997 (DPR), March 1998 (presidential); next DPR elections expected before the end of 1999 to be followed shortly afterwards by a presidential election Suharto stepped down as president on May 21st 1998, shortly after being re-elected for his seventh consecutive term; his successor, Mr Habibie, is not expected to serve out his full term, which ends in 2003; Golkar controls 325 of the 500 seats in the DPR In the Suharto era the three parties were the government s Sekretariat Bersama Golongan Karya (Golkar), the Partai Persatuan Pembangunan (PPP) and the Partai Demokrasi Indonesia (PDI). Since May at least 30 new parties have appeared including Partai Amanat Bangsa (PAB), PDI Perjuangan and Partai Kebangkitan Bangsa (PKB). President Vice-president Co-ordinating minister for defence & security Co-ordinating minister for economic, finance & industrial affairs Co-ordinating minister for development supervision & state administrative reform Co-ordinating minister for people s welfare and poverty alleviation Bacharuddin Jusuf Habibie vacant General Feisal Tanjung Ginanjar Kartasasmita Hartarto Sastrosunarto Haryono Suyono Key ministers Agriculture Sholeh Salahuddin Defence & security General Wiranto Finance Bambang Subianto Foreign affairs Ali Alatas Health Farid Antara Muluk Home affairs Lieutenant-General Syarwan Hamid Industry & trade Rahardi Ramelan Investment Hamzah Haz Justice Muladi Mines & energy Kuntoro Mangkusubroto Research & technology Zuhal State enterprise rehabilitation Tanri Abeng Tourism, arts & culture Marzuki Usman Transport Haryanto Dhanutirto Central bank governor Sjahril Sabirin

7 Indonesia 5 Economic structure Latest available figures Economic indicators a GDP at current market prices (Rp trn) Real GDP growth (%) Consumer price inflation (av; %) Population (m) Exports fob ($ bn) Imports fob ($ bn) Current-account balance ($ bn) Reserves excl gold ($ bn) Total external debt (disbursed; $ bn) Debt-service ratio, paid (%) Exchange rate (av; Rp:$) 2,087 2,161 2,249 2,342 2,909 b August 7th 1998 Rp12,750:$1 Origins of gross domestic product 1997 % of total Components of gross domestic product 1997 % of total Agriculture 16.1 Private consumption 62.2 Mining & quarrying 9.5 Government consumption 6.8 Manufacturing 25.6 Gross fixed capital formation 28.7 Construction 7.5 Stockbuilding 2.9 Trade, hotels & restaurants 16.7 Exports of goods & services 27.9 Transport & communications 6.8 Imports of goods & services 28.5 GDP at market prices incl others GDP at market prices Principal exports fob 1997 c $ m Principal imports cif 1997 c $ m Crude oil & products 6,783 Machinery & transport equipment 17,573 Natural gas 4,820 Other manufactures 6,491 Plywood 3,411 Chemicals 5,913 Ready-made garments 2,880 Fuels & lubricants 4,047 Textiles 2,389 Food, drinks & tobacco 3,223 Rubber 1,929 Raw materials 2,979 Total incl others 53,547 Total incl others 41,680 Main destinations of exports 1997 % of total Main origins of imports 1997 % of total Japan 23.3 Japan 19.8 US 13.3 US 13.1 Singapore 10.2 Singapore 8.2 South Korea 6.6 Germany 6.3 China 4.1 Australia 5.8 Netherlands 3.4 South Korea 5.6 a EIU and official estimates. b Actual. c Customs basis.

8 6 Indonesia Outlook for Mr Habibie has consolidated his position by distancing himself from his predecessor The main political forces are in no hurry to take over Two political blocs are emerging as the main contenders for power Indonesia s political outlook looks more hopeful than it did when Bacharuddin Jusuf Habibie took over from President Suharto on May 21st. Then it seemed that Mr Habibie was too fatally compromised by his close links with Suharto to respond to demands for political reform (and too antagonistic to market principles to reassure the markets). It is now just possible to see a way through the present period of transition to a new political order that is both stable and acceptable to a broad swathe of Indonesian public opinion. It is under this scenario that the timetable, leading to a presidential election at the end of 1999, is followed. Under the timetable, amendments that will open up the political and electoral systems and change the way that the country s legislative bodies are constituted will be passed by the end of this year, and a general election will be held by mid The amended political laws will ensure that the new president to be elected by the end of next year will reflect the results of the general election. Recent signs that a party political system is evolving comprising two or three large non-sectarian parties suggest a move away from the unstable, community-based politics of the post-independence years. The widespread expectation that Mr Habibie would shore up the political system created by his mentor and that he would even be manipulated by Suharto has proved wrong. Mr Habibie seems to have made the tactical judgement that his survival depends on distancing himself from Suharto and the evils of corruption, collusion and nepotism associated with the fallen president. He has instead emerged as an advocate of reform the vague catchword uniting the various constituencies that either opposed or withdrew their support from Suharto. Mr Habibie is not entirely convincing in this guise. Under Suharto he was illiberal towards his critics and, like his mentor, used his office to build up a family business empire. The various domestic constituencies that make up the new political landscape either do not see it as in their interests to challenge Mr Habibie for now, or do not have the clout to do so. For that reason the fact that Mr Habibie s attempts at reassurance have not really satisfied them probably does not really matter. The two forces crucial to Mr Habibie s survival in power are the armed forces and the cabinet technocrats led by the co-ordinating minister for economic, financial and industrial affairs, Ginanjar Kartasasmita. The military chiefs will tolerate him as long as he holds the line against policies they will not stomach, in particular against a tilt towards political Islam that would offend the secular forces that now dominate the upper ranks of the armed forces (and expose them to embarrassing investigations of past cases involving the military suppression of Muslims). Mr Habibie will not suffer the withdrawal of support from the economic policymakers in his cabinet that proved fatal to Suharto, as long as he continues to support the policies agreed with the IMF. In the face of the emergency now facing the economy he has little choice but to accept these policies. The mainstream opposition will not challenge Mr Habibie s timetable. It might have preferred the presidential election to be held sooner than under Mr Habibie s plan, but the constituents of this opposition no longer see the few

9 Indonesia 7 months that distinguish Mr Habibie s timetable from their own as evidence of time-wasting and bad faith on the part of the new president. Moreover, after years of government interference and suppression the opposition needs to build up its organisation and cement alliances. It now seems probable that two or three blocs will be the main contenders for power in the general election to be held in mid Although both will contain sectarian strands, in neither will these be dominant. They will be: a Java-based nationalist alliance based on PDI Perjuangan, the version of the Partai Demokrasi Indonesia run by Megawati Sukarnoputri (ex-president Sukarno s daughter); and the Partai Kebangkitan Bangsa (National Awakening Party, PKB), a new party formed by members of the country s largest Muslim social organisation, Nahdlatul Ulama (Awakening of Muslim Scholars, NU); the Partai Amanat Bangsa (People s Mandate Party, PAB) a new party led by the Muslim modernist, Amien Rais, also involving secular politicians and intellectuals and based on non-sectarian principles, possibly allied with modernist elements from the Suharto-era Muslim party, Partai Persatuan Pembangunan (Muslim United Development Party, PPP), and the newly formed modernist party, the Partai Bhlan Bintang (PBB). Assuming these alliances win the largest shares of the vote in the general election they are also likely to provide the two main contenders for the presidency later in the year. Under this scenario the presidential contest would pit Megawati against Mr Rais. An arrangement under which the two blocs enter into a coalition, with the larger one taking the presidency and the smaller one the vice-presidency with cabinet posts allocated on the basis of parliamentary strength, would be in the consensual spirit of the times. with Golkar a distant third A less benign scenario cannot be ruled out Mr Habibie s chances of winning a second term a situation he no longer completely rules out rests with the Sekretariat Bersama Golongan Karya (Golkar), which won 74% of the vote in the last general election. In the coming election Golkar will no longer enjoy the institutionalised support of the armed forces and bureaucracy, which were essential to its massive electoral victories during the Suharto era. Furthermore, the amendments to political parties and electoral laws will end the discriminatory treatment that was the other foundation of its electoral strength. Its new leadership is banking on continued conservative rural support to win it 30-35%, but no one expects it to win a majority and it is possible that, as the party of the old regime, its support will collapse completely. This benign scenario could easily be derailed, however. Although the spectre of sectarianism, political fragmentation and confrontation now looks remote, it cannot be discounted completely, especially in the current economic circumstances. The real danger to Mr Habibie s timetable is likely to be the state of the economy and the grievances it generates. The trade unions appear to have backed off from a looming confrontation with the armed forces, probably realising that recession does not provide the best conditions for organising workers. More probable than such organised protest is an eruption of unco-ordinated upheavals based on local grievances, often feeding on ethnic and religious sentiment, that will delay any prospect of economic recovery. The most likely outcome of such a descent into chaos is a return to authoritarianism.

10 8 Indonesia The economy will stay in a critical state as it contracts over the next two years The current level of political uncertainty and the fear that things could get a lot worse are important reasons why international confidence in Indonesia is still low. The clearest manifestation of this is the weak rupiah, which is hovering at around 80% below its pre-crisis level. The continued insistence by the IMF on handing out its disbursements in monthly instalments is taken as a vote of no confidence in the new government. Even an extra $6bn in IMFsponsored funds and nearly $8bn in quick-disbursing programme assistance from Indonesia s aid consortium has barely moved the markets. The EIU assumes that these capital inflows will strengthen the rupiah over the next two years, but essentially the economy will remain in a critical condition during the forecast period. The latest IMF programme is an emergency programme that sanctions a budget deficit equivalent to 8.5% of GDP to pay for an enormously increased subsidies bill. This is to meet the needs of an economy in which poverty is already back to the levels of the mid-1970s and the unemployment rate is approaching 20%. The economy is in for at least two years of contraction. GDP is now expected to fall by 15% in 1998, and by 2.3% in Preliminary production-based GDP data show a decline in output of 12.2% in the first half of 1998 compared with the same period of After accelerating from 7.9% in the first quarter of 1997 to 16.5% in the third, the rate of decline is expected to hit its low point in the third quarter of 1998 before moderating in the fourth as the basis of comparison becomes the already-stagnant fourth quarter of On a production basis, manufacturing, construction, trade and financial services will continue to suffer the most serious declines. Agriculture will prove relatively resilient, but by no means immune to the crisis. This year rice output has been affected by the drought related to the El Niño weather phenomenon, but has also been hit by such crisis-related phenomena as low procurement prices and lack of access to credit for the purchase of inputs. Indonesia s recovery from its last major economic crisis, in the mid-1960s, was rapid for several reasons. One was its large agricultural sector and its tiny manufacturing base. Another was a change of government that created foreign confidence and led quite quickly to large inflows of foreign direct investment (FDI) and aid. A third was that it was a tiny economy in which financial institutions were rudimentary. None of these conditions now apply; the manufacturing and financial services sectors have broken down and will not be quickly restored, FDI will be scarce over the next two years, and aid will be for emergency rather than productive purposes. The 8.5% budget deficit is now on paper more than fully funded by foreign aid. Some of the assumptions made by the government that previously off-budget funds can be incorporated into the budget, that $1.5bn can be raised in privatisation receipts and that state enterprise revenue can be boosted look vulnerable. There will also be a sharp increase in the rupiah cost of servicing government domestic debt, and high inflation could well push the subsidies bill up further. Moreover the most important component of its revenue non-oil and gas domestic receipts is collapsing as a result of the severe recession.

11 Indonesia 9 Rapid monetary growth will keep inflationary pressure high Inflationary forces will remain strong whatever happens. The depreciation of the rupiah, the problems of agriculture and the breakdown of the distribution system as a result of rioting and the flight of ethnic Chinese traders, have already ensured an average inflation rate approaching 80% this year. Some relief in all these areas is likely over the next year. However, inflationary pressures will remain strong. Money supply has been growing rapidly the authorities channel funds into the ailing banks and into subsidies. High nominal interest rates have not been sufficient to mop up these funds through openmarket operations. (Indeed, by raising costs, high interest rates may actually be fuelling inflation.) Large inflows of official capital to fund rupiah-financed budget spending on subsidies and other areas will keep inflationary pressure from money-supply growth high over the next year. Forecast summary ($ bn unless otherwise indicated) 1996 a 1997 b 1998 c 1999 c Real GDP growth (%) Consumer price inflation (av; %) Exports fob Imports fob Current-account balance Exchange rate (av; Rp:$) 2,342 2,909 a 10,655 9,500 a Actual. b EIU and official estimates. c EIU forecasts. There is no prospect of an export-led recovery These capital inflows will eventually help stabilise the rupiah, as will the surplus on the current account. Indonesia s external environment is not conducive to a quick recovery. Demand growth in two of its main markets, Japan and the Association of South-East Asian Nations (ASEAN), will contract in 1998 and will be flat at best in Partly because of the Asian crisis, GDP growth in the US, Indonesia s third main market, will slow over the next two years. Weak world demand will translate into slower world trade growth. Reflecting this slowdown, prices of Indonesia s leading exports will be weak. There will be sharp falls in the prices of soft commodities and industrial raw materials this year, which will not be made up by the modest improvement in prices expected in The oil price is expected to show a similar pattern: after falling by more than 18% in 1998, it is expected to increase by 7% next year, but at around $17/barrel it will stay well below mid-1990s levels. The dollar price of manufactured exports will also be weak, reflecting weak demand, currency realignments and other downward pressures on costs, in Asia and elsewhere. but the current account will be in surplus Any hope of an export-led recovery rests on achieving healthy volume growth. But that is precluded by the unhealthy state of the productive base and shortages of working capital and trade finance, and an export-led recovery will therefore be slow in coming. Next year we expect exports to grow in both dollar and real terms, but not by enough to compensate for this year s decline. Despite this performance the trade surplus will rise markedly on the strength of falling imports (down in dollar terms by 15% this year and by more than 4% next). Declining tourism revenue will be offset by lower trade-related payments on the services account, and higher amounts of public transfers in the form of grant aid will partly compensate for the drop-off in private transfers.

12 10 Indonesia Economic results and forecasts (Rp bn; constant 1993 market prices; % change year on year in brackets unless otherwise indicated) 1996 a 1997 b 1998 c 1999 c Private consumption 255, , , ,429 (15.3) (4.4) ( 15.0) ( 5.0) Government consumption 32,028 32,828 30,202 29,749 (3.8) (2.5) ( 8.0) ( 1.5) Gross fixed capital formation 129, , , ,194 (14.9) (4.8) ( 15.9) ( 3.2) Stockbuilding 10,438 10,382 1,500 4,500 (-2.1) d ( 0.1) d ( 2.0) d (1.0) d Exports of goods & services 110, , , ,157 (5.5) (7.4) ( 2.0) (1.0) Imports of goods & services 122, , , ,765 (18.2) (5.7) ( 8.1) ( 2.2) GDP 414, , , ,264 (8.0) (4.6) ( 15.0) ( 2.3) a Official data. b EIU estimates. c EIU forecasts. d Change in stocks as a percentage of GDP in the previous year Gross domestic product % change, year on year Indonesia Asia excl Japan (a) 98(b) 99(b) (a) EIU and official estimates. (b) EIU forecasts. (c) Nominal exchange rates adjusted for changes in relative consumer prices. Sources: EIU; IMF, International Financial Statistics; World Economic Outlook. Rupiah real exchange rate (c) 1990= Rp:$ Rp:DM Rp: (a) 98(b) 99(b) Review The political scene Mr Habibie establishes an identity Two months since his unexpected rise to the presidency Bacharuddin Jusuf Habibie is almost looking secure. His own growing confidence was evident by mid-july when he refused to rule out standing for a second term. Initial suspicions that he would be a puppet of Suharto, the previous president, who it was feared would continue to manipulate events from behind the scenes, have proved wrong. Mr Habibie had been Suharto s protégé since childhood and owed his election as vice-president in March not to his power base (which was

13 Indonesia 11 tiny) but to his mentor. He became president in May only because it was constitutionally required once Suharto stepped down. as he seeks to satisfy diverse constituencies Since taking over from Suharto on May 21st Mr Habibie has plainly recognised that his political survival depends on his ability to play to the diverse constituencies that forced Suharto to step down and now dominate the political landscape. These constituencies are: the military high command, led by the defence minister and armed forces commander, General Wiranto; the economic policymakers in the cabinet, among whom the co-ordinating minister for economic, financial and industrial affairs, Ginanjar Kartasasmita, is the most prominent, both in terms of his present job and his political ambitions; the various strains of political Islam; the markets, the multilateral financial institutions and the governments of leading donor countries; the loose opposition of politicians, students and non-governmental organisations (NGOs) whose pressure toppled Suharto and whose constituent parts have now gone in their own directions. He has sought to live down his past and although there is a credibility gap he has distanced himself from Suharto All of these constituencies have reasons to distrust Mr Habibie given his previous closeness to Suharto, his reputation as a profligate spender on high-tech white elephants, his cultivation of Islam and his intrusiveness in military procurements. To live down his past Mr Habibie has both distanced himself from Suharto and remade himself as an advocate of reform and an opponent of the corruption, collusion and nepotism that characterised the old regime, as well as an adherent of democracy, human rights and IMF programmes. A new deal has been worked out with the IMF and disbursements have started to flow again. On the strength of promised amendments to the restrictive old political parties law at least 30 new parties have been set up. Also, trade unions no longer require government recognition, many political prisoners have been released, and the new government has ratified international labour and human rights covenants. Yet Mr Habibie s grip on power is not fully secure. He remains president by default and as such is potentially vulnerable to sudden shifts in support. He has made some populist gestures, but has no real control over the great upheavals going on at local level. Moreover, faced with mounting social unrest he is coming under pressure from the armed forces, the Angkatan Bersenjata Republik Indonesia (ABRI) for tighter controls on freedom of expression and assembly. Despite achieving promises of large official capital inflows and some movement on resolving the massive private corporate debt overhang, the markets have not been won over. The lack of market confidence is related to a greater failure: his failure to reassure the economically strategic, ethnic Chinese community, whose members suffered looting, destruction, rape and murder during the May riots. The task of distancing himself from Suharto has been made easier by the disdain with which Suharto apparently treated his former protégé during the

14 12 Indonesia handover. Suharto s alleged treatment of his successor confirmed earlier suspicions that he chose Mr Habibie as his vice-president in March precisely because he did not regard him as presidential material. Manoeuvrings within the former president s political vehicle, the Sekretariat Bersama Golongan Karya (Golkar), culminating in the congress of July 9th-10th (see box), strongly suggested that the former president s family and political allies were hoping to use their remaining political capital to unseat Mr Habibie. The failure of the pro-suharto/anti-habibie forces last-ditch effort to retain control of Golkar strengthened Mr Habibie s hand in two ways. First, it confirmed that he was not Suharto s ally. Second, it averted the prospect of Suharto forces using their control of the largest voting bloc at the special session of the People s Consultative Assembly (Majelis Permuswayaratan Rakyat, MPR) in November to impeach Mr Habibie. The president s timetable gains acceptance For various reasons these constituencies now seem prepared to settle for Mr Habibie as president, at least for the transitional period envisaged in the timetable, which culminates in December 1999 with an MPR session to elect a president. Many political players, including such moderates as Emil Salim and Mr Ginanjar, had publicly argued in May that Mr Habibie s timetable should be accelerated in order to resolve the issue of political legitimacy once and for all. There is now growing acceptance of Mr Habibie s timetable in the political establishment. This is partly because of the severity of the economic crisis, which some argue requires that politics be put to one side for the moment. There are, however, other factors. Mr Habibie s opponents, just as much as his allies, need a transitional period during which they can consolidate the process of party-building that has just begun. as it gets under way The first important stage of the timetable the amendment of key political legislation is well under way. Three laws, covering political parties, elections and the composition of legislative bodies, are being drafted with input from the House of People s Representatives (Dewan Perwakilan Rakyat, DPR) something that was unknown in Suharto s day. The electoral law will introduce a system combining both district-based constituencies, in which a first-past-the-post voting system will be used, and proportional representation. The system now in force, based exclusively on proportional representation, has meant that MPs have not had to develop local bases. However, some politicians, including the democrats of the soon-to-beformed Partai Amanat Bangsa (People s Mandate Party, PAB) see dangers in a district system in the present Indonesian context of money politics, sectarianism and weak supervision. Under the political parties law the special position of Golkar will end. All parties will be able to operate down to village level. Civil servants will no longer be obliged to vote for Golkar. Their organisation, Korps Pegawai Negeri (Korpri), will no longer form part of Golkar and its members will not have to campaign for it. All political parties will be recognised. They must accept the state ideology, Pancasila (the five principles of monotheism, humanitarianism,

15 Indonesia 13 Mr Habibie s supporters and enemies Conditional supporters The parliamentary leadership. The speaker of the two houses, Harmoko, who played a decisive role in Suharto s fall by switching loyalties, and the four parliamentary faction leaders. They have endorsed Mr Habibie s timetable. The government vehicle, Sekretariat Bersama Golongan Karya (Golkar), now led by Akbar Tanjung, who also holds the important position of cabinet secretary. The two recognised opposition parties of the Suharto era, the Partai Persatuan Pembangunan (Muslim United Development Party, PPP) and the Soerjadi faction of the Partai Demokrasi Indonesia (Indonesian Democratic Party, PDI). Three members of these parties Hamzah Haz and AM Saefuddin (PPP) and Panangian Siregar (PDI) sit in Mr Habibie s cabinet. Mainstream members of the armed forces, the Angkatan Bersenjata Republik Indonesia (the ABRI), led by the armed forces commander and defence minister, General Wiranto. At various points, such as at the Golkar congress in July, their support has been decisive for Mr Habibie. The Ginanjar group. A group of 11 cabinet ministers led by Ginanjar Kartasasmita, who delivered the fatal blow to Suharto when they called on him to resign. Mr Ginanjar has his own presidential ambitions and would probably not support Mr Habibie if he were to seek a second term. Muslim mass organisations such as Komite Indonesia untuk Solidaritas Dunia Islam (Committee for World Muslim Solidarity, KISDI), which openly promotes an Islamic state and anti-chinese sentiment. Muslim students and intellectuals who abandoned their demonstrations once Mr Habibie had succeeded Suharto. They include Yusril Ihza Mahendra, who has set up the Partai Bulan Bintang (PBB). The mainstream opposition The liberal opposition. Ranges from the Forum Kelompok Kekuatan Penyeimbang (Forum of the Balancing Forces Group, FKKP), which is on the fringes of the new government, to Majelis Amanat Rakyat (Assembly of the People s Mandate, Mara), the group of hard-headed liberals, several of them former dissidents, who will form the core of the new Partai Amanat Bangsa (People s Mandate Party, PAB). Interestingly Amien Rais has been a key figure in both groups. The elite opposition. Its most effective component has been Gema Madani, a non-governmental organisation formed in the lead-up to the last presidential election that promoted the candidacy of the former technocrat minister, Emil Salim. Former senior technocrats and retired generals are heavily represented. PDI Perjuangan. Megawati Sukarnoputri s party needs time to regain control of the political machine from which it was ousted two years ago, and to forge alliances. The Nahdlatul Ulama (Awakening of Muslim Scholars, NU). The traditionalist Muslim social organisation whose base is the Javanese countryside and which claims a membership of 35m. Under the leadership of a long-time pro-democrat, Abdurrahman Wahid, it cautiously opposed Suharto. Much closer to PDI Perjuangan than to modernist Muslim groups. The formation of the Partai Kebangkitan Bangsa (National Awakening Party, PKB) by NU members effectively ends the renunciation of politics it made in Business and the professional class. They are prepared to support Mr Habibie as an interim figure, but needs to see progress on economic stabilisation. Diehard opponents The Suhartoists. As the epitome of corruption, collusion and nepotism, they are very much on the defensive. Recent changes in Golkar and the armed forces have deprived the former president of what were formerly his two main bases of support. Student radicals, usually not associated with the semi-official student councils, who see Mr Habibie as fatally compromised by his record under Suharto. Small nationalist groupings, in some cases led by former senior government officials and retired military figures. They include such groups as the Petition of 50 group and the Foundation for National Concord and Brotherhood, which have existed on the political margins for some years.

16 14 Indonesia The government s timetable July-October 1998: Revise the three political laws on political parties, elections and composition of the People s Consultative Assembly (Majelis Permusyawaratan Rakyat, MPR), the House of People s Representatives (Dewan Perwakilan Rakyat, DPR), and local assemblies. November 1998: Convene a special MPR session to confirm the new laws and set a date for elections. January 1999: Enact the three political laws, form political parties and prepare for election. May or June 1999: Hold general election. December 1999: Convene MPR to elect a president and vice-president. Indonesian unity, representative democracy by consensus and social justice), and must not promote ethnic, religious or group hatred. Under the draft law on the composition of the legislatures being prepared by the home affairs ministry, the number of military appointees in the DPR will fall from 75 to 50. Membership of the MPR will shrink, from the present 1,000 to 700. The president will be required to address the MPR annually rather than every five years. The new MPR will consist of the full membership of the DPR, 135 regional representatives (5 from each province) and 65 representatives of interest groups. The members from the regions will be appointed after consultation with the DPR rather than directly by the president as at present. The next stages of the process are also under way. The special session of the MPR has been set for November 10th, slightly earlier than initially planned, when the MPR will ratify the new political legislation. The factions have begun making changes to their MPR memberships; Golkar has pledged to purge its MPR roster of people tainted by corruption, collusion and nepotism. Soon after its congress it dropped seven Suharto family members from its MPR list. Mr Habibie opens up party politics Within days of becoming president Mr Habibie announced that the party system was to be opened. For most of Suharto s period in power, party politics was tightly controlled. After 1972 only two political parties existed legally, the Partai Pertsatuan Pembangunan (Muslim United Development Party, PPP) and the Christian, nationalist Partai Demokrasi Indonesia (Indonesian Democratic Party, PDI). Both were overshadowed by Golkar, which was not formally a political party but a coalition of functional groups. As such it was not subject to the same restrictions on campaigning as the PDI and the PPP. Golkar s electoral successes (in the last general election it polled 74% of the vote) rested heavily on the involvement of the armed forces and the bureaucracy. Golkar was founded by the military in the early 1960s to counter the growing strength of the Partai Komunis Indonesia (Indonesian Communist Party, PKI). Retired military men head 21 of Golkar s 27 provincial branches. Members of

17 Indonesia 15 the bureaucracy were obliged by law to vote for it, and at village level they used their influence to win votes for it. Suharto had ultimate control of the party, as chairman of its Board of Patrons. and new parties mushroom The new president s announcement led to an immediate explosion of new parties. There were fears even among secular liberals that these parties were harbingers of either political fragmentation or political sectarianism, either of which might end in a return to authoritarianism. By late June the lengthening list of around 30 parties included several religiously based parties, at least two Chinese parties and many workers and farmers parties. A month later a more reassuring political landscape seemed to be emerging in which large parties, often in alliance with each other, would dominate the scene. Party political developments in July July 9th-10th: Golkar holds an extraordinary National Congress at which pro-habibie forces are in the ascendant. July 17th: The former vice-president, Try Sutrisno, and the former armed forces commander and defence minister, General Edi Sudradjat, announce the formation of the Barisan Nasional (National Front, BN), which includes several other prominent retired military men as well as a number of Golkar stalwarts who had lost out at the National Congress. July 23rd: Members of Nahdlatul Ulama (Awakening of Muslim Scholars, NU) announce the formation of the Partai Kebangkitan Bangsa (National Awakening Party, PKB). July 26th-27th: Followers of Megawati Sukarnoputri s PDI Perjuangan gather in Yogyakarta and Jakarta to commemorate the attack on the PDI headquarters in Jakarta two years before. July 27th: Amien Rais announces that an open and pluralist party, the Partai Amanat Bangsa (People s Mandate Party, PAB), will be formed on August 17th. Pro-Habibie forces capture Golkar At an extraordinary national convention on July 9th-11th, in the first democratic election in its history, Golkar chose the cabinet secretary, Akbar Tanjung, to chair its Central Executive Council by a vote of 19 to 10. Mr Tanjung defeated an uncomfortable alliance, comprising Suharto loyalists, retired generals and anti-habibie civilian politicians. The candidate of the latter group was a former defence minister, General Edi Sudradjat. General Sudradjat had some strengths, notably his links with the retired generals who largely control Golkar s provincial councils. The vote for Mr Tanjung was an act of self-preservation: Mr Tanjung was seen as Golkar s only hope for survival as a serious party. No less important was the role of the armed forces and (secondarily) the bureaucracy. The capture of the party by Mr Habibie allies may send it in a more Muslim direction, something the secular armed forces high command could be expected to oppose. But in the lead-up to the congress General Wiranto and others in the high command made it clear that they

18 16 Indonesia favoured a Habibie victory, and direct pressure was reportedly applied by both the military and the home affairs ministry to secure one. dealing the Suhartoists a severe blow The congress also voted to abolish Golkar s Council of Patrons, through which Suharto had continued to exercise influence in the pre-congress period, chiefly by getting allies appointed to key congress committees. The Suharto agenda seems to have been to secure the election of a sympathetic Golkar chairman, purge Golkar of allies of Mr Habibie and impeach the new president at the special session of the MPR in November. Instead, in the wake of Mr Tanjung s victory about 60 Suharto supporters were stripped of their MPR membership, including seven family members. On July 17th several of the retired generals and civilian politicians who had supported Gerard Sudradjat s candidacy formed the Barisan Nasional (National Front, BN). BN said that it regretted the interference of ABRI and the bureaucracy in the Golkar congress. In the confusing new world of Indonesian politics the most likely course for BN seemed to be to align itself with Megawati Sukarnoputri s PDI Perjuangan (PDI struggle ) and the Partai Kebangkitan Bangsa (National Awakening Party, PKB). Megawati begins to retake the PDI A decisive moment in the fall of Suharto was the ousting of Megawati from the chairmanship of the PDI in June 1996 through a coup orchestrated by the government. Popular disapproval of the coup was evident in the collapse of the PDI vote in the 1996 general election. Since May PDI Perjuangan has been regaining control of the party organisation (often by the forcible occupation of branch headquarters), and has been pressing its claim that it, rather than the Soerjadi group which supplanted it, should be recognised as the true PDI. Relations between Megawati and Mr Habibie are not good. This seems to have been prompted by Mr Habibie s refusal to give a clear view on which faction of the PDI he regards as the legitimate one. The inclusion in the cabinet of several people who had played an important role in Megawati s ouster at the Medan congress in June 1996 and the violent takeover of the PDI headquarters in Jakarta the following month is another reason why relations are cool. and once again draws close to Abdurrahman Wahid Amien Rais resists the lure of sectarianism In early July Abdurrahman Wahid, chairman of the country s largest Muslim social organisation, Nahdlatul Ulama (Awakening of Muslim Scholars, NU), announced that he had taken a personal decision to align himself with PDI Perjuangan. (In late 1996 the Suharto government managed to sabotage an earlier alliance between the two.) His spokesman refused to say whether this meant that Mr Wahid and Megawati were about to form a new party. In the event, on July 23rd NU members formed their own party, the PKB. Its leadership largely overlaps with the leadership of NU, although it does not include Mr Wahid himself. Because the NU has a membership of 35m the PKB may become the largest party of all. It will benefit from defections from the PPP, in which NU members have for a long time been junior partners to the modernist Muslim Indonesia group. Fear of sectarian politics in the Indonesian context is fear of a return to pre-suharto politics of the 1950s and 1960s, in which communal loyalties (re-

19 Indonesia 17 ferred to as aliran streams ) shaped political allegiances. The chief divide of that time was between Islamic-based and secular politics. In determining whether this sort of politics would re-emerge, the position of Amien Rais was bound to be important. Mr Rais is the head of the 28m-member modernist Muslim social organisation, Muhammadiyah, and effectively was leader of the protest movement that helped topple Suharto. In the event he turned down invitations from new modernist Muslim parties, such as Yusril Ihza Mahendra s Partai Bulan Bintang, and will formally launch the PAB on August 17th together with a number of secular academics, professionals and intellectuals. Mr Rais s stated primary concern is that there not be return to destructive aliran politics. In the weeks leading up to the decision to form the PAB he had frequently warned of the risk of Yugoslav- or Soviet-style national disintegration. An explosion of unrest in the provinces has put the military in a quandary Calls mount for investigations into the Suharto riches Since the resignation of Suharto there has been an explosion of unrest outside Jakarta. It has taken two basic forms, although in practice it has frequently been difficult to distinguish one from the other. There have been organised protests down to village level, often involving students and professionals, against officials alleged to have engaged in corruption, collusion and nepotism. There have also been spontaneous outbursts of what has been come to be called penjaharan (mayhem). Often driven by economic desparation, penjaharan includes land occupations, commonly by people who had been displaced by projects associated with Suharto, his family and friends. In one such instance local people invaded Suharto s Tapos ranch in West Java. Others responsible are also those who, after losing jobs in the cities, have returned to the countryside only to find it no easier to earn a living. The mostly orderly demonstrations have been directed at governors, district heads and village chiefs throughout the archipelago. Sometimes (in such small towns as Tegal and Jepara in Central Java and Lamongan in East Java) they have ended with people going on the rampage, typically making ethnic Chinese traders targets of their rage. The response of the armed forces to this activity has been uncertain. The issue is complicated by the fact that many of those under attack by protestors are serving or retired members of the armed forces. Some local commanders have given their backing to efforts to expunge corruption, collusion and nepotism. In late July General Wiranto issued a warning that penjaharan would not be tolerated even if it was done to save oneself from starvation. The July 6th issue of the US magazine, Forbes, which contained its annual survey of the world s richest people, estimated the Suharto family wealth at at least $4bn and said that family members had stakes in some 2,000 companies. Last year, before the collapse of the rupiah, Forbes had put the family s assets at $16bn. Local sources have put the family wealth at anywhere between $15bn and $40bn. Quite what should be done about the Suharto wealth has become a difficult political, legal and economic issue. The accumulation of riches by members of the Suharto family is the prime example of the now universallydeplored phenomenon of corruption, collusion and nepotism. Respected domestic NGOs such as Gerakan Masyarakat Peduli Harta Negara (the movement of society concerned about the state s riches, Gempita) and Indonesian