TIME Asia | Close to the Edge

	ASIA	JANUARY 19, 1998 VOL. 151 NO. 2
Close to the Edge As the rupiah plummets and panic buying erupts in the capital, Indonesians are openly asking: Should President Suharto step down? BY MICHAEL S. SERRILL For more than three decades, President Suharto and his New Order regime have governed Indonesia on the strength of an unwritten social contract. In return for a promise of stability and economic growth, Indonesians acquiesced to giving Bapak (Father) Suharto open-ended authoritarian power. The compact has held, despite enormous corruption and self-dealing on the part of Suharto's cronies and children, largely because the President kept his end of the bargain. For 30 years, Indonesia has enjoyed almost uninterrupted economic expansion, at an average rate of 6.5% a year, making it the World Bank's model of development and poverty reduction for the entire Third World. Suddenly last week, the contract between people and government started falling apart, and Indonesia seemed to be entering a new Year of Living Dangerously. After Suharto delivered a 1998-99 budget proposal that appeared to ignore economic reality--as well as the International Monetary Fund bailout plan the government unveiled on Oct. 31--Indonesia's currency and stock markets went into an accelerated tailspin. The rupiah, plunging more than 10% a day for most of the week, fell at one point to a record 10,500 to the U.S. dollar before recovering to 8,150 on Friday. In July the rate was 2,500. At the stock exchange, the Jakarta Composite Index plummeted 12% on Thursday alone, ending the week down a total of 16%. "It's very, very depressing," says Christianto Wibisono, director of the Indonesian Business Data Center. "People are preoccupied with buying up basic foods. It's becoming a matter of survival." With Indonesia's crisis, the financial blight in Asia has reached a new and worrisome stage. When the IMF-led effort in recent months committed a combined $117 billion in rescue packages for Thailand, Indonesia and South Korea, there were hopes that the injections would prop up confidence long enough for Asia's leaders to get their financial houses in order. But the fund's billions haven't been able to stop the region's stock-market and currency slides, and the troubles are spreading. Led by the rupiah, most of Asia's currencies took a severe beating last week. The Thai baht, Malaysian ringgit and Philippine peso fell to record lows. Even in Hong Kong, where the local currency remained rock steady last year despite speculators' bets against it, the cost of preserving the link to the dollar is taking a toll. The prime lending rate was lifted by a full point last week to 10.25%, which is sure to hurt the territory's vast property sector. The Hang Seng index fell 17% during the week. Rumors were flying in Hong Kong on Friday that Peregrine Investment Holdings, the territory's largest investment bank, was on the verge of collapse. A swashbuckling market player closely allied with some of Hong Kong's largest tycoons, Peregrine had been counting on a $200 million cash injection from the Zurich Group. But the Swiss suitor abruptly pulled out of the deal as the extent of Peregrine's problems became clear. The investment bank's plight revealed exactly how the region's woes are interconnected: Peregrine's debt headache stems largely from a loan of more than $250 million that it extended to Steady Safe, a troubled Indonesian taxi company. [ Page 1 \| Page 2 \| Page 3 \| Page 4 \| Page 5 ]
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As the rupiah plummets and panic buying erupts in the capital, Indonesians are openly asking: Should President Suharto step down?

BY MICHAEL S. SERRILL

For more than three decades, President Suharto and his New Order regime have governed Indonesia on the strength of an unwritten social contract. In return for a promise of stability and economic growth, Indonesians acquiesced to giving Bapak (Father) Suharto open-ended authoritarian power. The compact has held, despite enormous corruption and self-dealing on the part of Suharto's cronies and children, largely because the President kept his end of the bargain. For 30 years, Indonesia has enjoyed almost uninterrupted economic expansion, at an average rate of 6.5% a year, making it the World Bank's model of development and poverty reduction for the entire Third World.

Suddenly last week, the contract between people and government started falling apart, and Indonesia seemed to be entering a new Year of Living Dangerously. After Suharto delivered a 1998-99 budget proposal that appeared to ignore economic reality--as well as the International Monetary Fund bailout plan the government unveiled on Oct. 31--Indonesia's currency and stock markets went into an accelerated tailspin. The rupiah, plunging more than 10% a day for most of the week, fell at one point to a record 10,500 to the U.S. dollar before recovering to 8,150 on Friday. In July the rate was 2,500. At the stock exchange, the Jakarta Composite Index plummeted 12% on Thursday alone, ending the week down a total of 16%. "It's very, very depressing," says Christianto Wibisono, director of the Indonesian Business Data Center. "People are preoccupied with buying up basic foods. It's becoming a matter of survival."

With Indonesia's crisis, the financial blight in Asia has reached a new and worrisome stage. When the IMF-led effort in recent months committed a combined $117 billion in rescue packages for Thailand, Indonesia and South Korea, there were hopes that the injections would prop up confidence long enough for Asia's leaders to get their financial houses in order. But the fund's billions haven't been able to stop the region's stock-market and currency slides, and the troubles are spreading. Led by the rupiah, most of Asia's currencies took a severe beating last week. The Thai baht, Malaysian ringgit and Philippine peso fell to record lows. Even in Hong Kong, where the local currency remained rock steady last year despite speculators' bets against it, the cost of preserving the link to the dollar is taking a toll. The prime lending rate was lifted by a full point last week to 10.25%, which is sure to hurt the territory's vast property sector. The Hang Seng index fell 17% during the week.

Rumors were flying in Hong Kong on Friday that Peregrine Investment Holdings, the territory's largest investment bank, was on the verge of collapse. A swashbuckling market player closely allied with some of Hong Kong's largest tycoons, Peregrine had been counting on a $200 million cash injection from the Zurich Group. But the Swiss suitor abruptly pulled out of the deal as the extent of Peregrine's problems became clear. The investment bank's plight revealed exactly how the region's woes are interconnected: Peregrine's debt headache stems largely from a loan of more than $250 million that it extended to Steady Safe, a troubled Indonesian taxi company.

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