TIME Asia | Race Against Time

INDONESIA: Threatened by food riots and a crumbling currency, Suharto finally tackles the corrupt business empires he helped build HONG KONG: The collapse of Peregrine Investments highlights the risky dealings that underpin the region's economies	ASIA	January 26, 1998 VOL. 151 NO. 3
Race Against Time Suharto signs a new IMF agreement, but skeptics ask: Can anything save Indonesia from collapse? By NISID HAJARI n Glodok, a once-bustling hub of electronics stores in north Jakarta, Rudy Kurniawan faces a simple equation. As recently as last June, the small shopowner sold 10 computers a week; he'll be lucky to unload two this month. Although Kurniawan has doubled his prices, the Indonesian rupiah has plunged so drastically in recent weeks that he won't break even. Rent is due in a fortnight--in U.S. dollars. "If it's like this for another two months, we'll close," Kurniawan says, as his five employees listen intently. "If we can't cut a better deal with the landlord, we'll close sooner than that." Tose's mouth is full of falcon feathers these days. Peregrine crashed to earth last week with no obvious sign that its management had become unfocused. Rather, its collapse was precipitated by an unhedged U.S.-dollar denominated loan of $265 million to a taxicab company in Jakarta: quite a venture for a financial firm with a capital base of only $900 million. The taxi company can't pay its debt because the value of Indonesia's currency, in which local cab fares are denominated, has gone through the ocean floor. At a press conference last week, Tose was unrepentant, scoffing at pundits who call hindsight wisdom. "What happened was a complete meltdown," he insisted, saying further that the collapse of the Indonesian rupiah was something "no one in their right mind would have even factored in." Five kilometers away in the leafy suburb of Menteng, far more complex calculations were being made last week. As Kurniawan's plight repeated itself across Indonesia, embattled President Suharto confronted his own grim endgame--a currency in free fall, brazen calls for his ouster, the specter of street violence and the subtle displeasure of several powerful allies, including the United States. By Wednesday, when International Monetary Fund chief Michel Camdessus arrived to negotiate conditions for the continuation of the imf's $43 billion bailout of Indonesia's disintegrating economy, Suharto's credibility teetered on the verge of bankruptcy. He responded with equally drastic measures. For the first time, the 76-year-old President agreed specifically to dismantle the infamous system of monopolies, tax breaks and subsidies that has made his business cronies and his six children embarrassingly wealthy. Asia's longest-serving leader appears willing to relinquish part of his empire in order to retain his throne. The 50-point agreement announced by Suharto and Camdessus strikes directly at the personalized, highly corrupt system that has sustained the President and his closest associates until now. Suharto's youngest son, Hutomo ("Tommy²) Mandala Putra, will lose not only the lucrative monopoly on cloves--used in the country's pungent kretek cigarettes--but also the tax breaks and tariff concessions that have kept alive his faltering "national car" program. Several intimates, including favored eldest daughter Siti Hardiyanti Rukmana, known as "Tutut", have seen some of their cherished infrastructure projects put on hold, and special incentives for the country's aerospace program have ceased. The deal calls for an end to fuel and electricity subsidies and the abolition of state monopolies over all food staples except rice, and the breakup of distribution cartels for paper, plywood and cement. The ludicrous budget estimates that first sent the rupiah reeling a week earlier have been revised to reflect reality more closely: inflation predictions for the year have been adjusted from 9% to 20%, growth is estimated at zero rather than 4%, and an exchange rate of 5,000 rupiah to the dollar is used, rather than 4,000. But will all of this be enough to stave off financial collapse? The accord met with singular disdain from investors and skepticism from ordinary Indonesians. Jakarta's stock exchange tumbled 4.1% for the day, and the rupiah lost an additional 9% against the dollar (the currency continued to slide on Friday). In part, the pessimism reflects worries about the fortunes of those hurt most by the agreement. Of the $70 billion in foreign debt held by Indonesia's private sector, a significant percentage is thought to be owed by companies owned or controlled by First Family members and Suharto cronies. The accord makes no provision for managing that burden, which could increase dramatically if the property market--in which they are invested heavily--collapses, as many expect. The ensuing corporate defaults would in turn threaten the fragile banking sector. Already some financial institutions have been unable to hand over depositors' money on request, and economists say at least half of the country's 222 banks should be shut down. A meltdown could have international repercussions. Japanese banks alone have lent more than $23 billion to Indonesia. At the same time, many investors seem to feel that even dramatic gestures are empty at this point. "This was the last potential circuit breaker, but we're a bit past it now," says Jonathan Harris, head of research at hsbc James Capel Securities in Jakarta. "Nothing the imf can say is going to avert the massive unemployment, huge inflation and mass bankruptcies which are coming down in the next six weeks." Unless the rupiah, trading at 8,750 to the dollar at Friday's close, rises to at least 4,500, the country faces widespread and imminent bankruptcies. Many employers are keeping their firms going only until the culmination of the fasting month of Ramadan, when workers traditionally return home to their families for several days. "They are afraid that if they do it before then, the workers will destroy the factories," says union official Aban Rusmawan. More than 2 million workers were laid off in the last four months of 1997, and millions more are expected to join them in the next few weeks. Even those who have retained their jobs have lost overtime wages, while the costs of staple goods have soared. In the industrial district of Tangerang, on the outskirts of Jakarta, the price of rice has nearly doubled since August, as has the price of cooking oil. "We used to eat chicken," says Sopri, a worker at a Tangerang plastics factory, who supports a wife and two children on the government-mandated minimum wage of 172,500 rupiah a month, currently worth about $20. "Now we eat only rice and vegetables." In three towns in East Java last week, the army quelled riots over the rise in food prices. For now, few expect such scattered disturbances to topple Suharto's 32-year administration. But the lukewarm reaction to the imf accord suggests that the President's gamble may fail. "The economic situation has been succeeded by the political situation, and it's not going to get much better until that's been resolved," says Harris. Demands that Suharto not accept a seventh term as President in March have become loud and direct. In a fiery speech on Jan. 10, opposition leader Megawati Sukarnoputri openly offered herself as a replacement. The leaders of Indonesia's two main Muslim organizations, the 34-million-member Nahdlatul Ulama and the 28-million-strong Muhammadiyah, have seconded her calls for Suharto to step down. Even the once unthinkable gesture of cutting off his inner circle may no longer satisfy many Indonesians. "They must be prohibited from leaving the country," says Muhammadiyah leader Amien Rais of Suharto's family and cronies. "We will pardon them if they give the money back." Despite the opposition's apparent unity, however, only the nation's powerful military could conceivably force Suharto out of office, and army brass seem unlikely to attempt that at the moment. Generals loyal to the President hope merely to maintain order until he names a new Vice President--and heir-apparent--in two months. Like shopowner Rudy Kurniawan, however, many Indonesians may not be able to wait that long. Reported by John Colmey/Singapore and David Liebhold/Jakarta
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Suharto signs a new IMF agreement, but skeptics ask: Can anything save Indonesia from collapse?

By NISID HAJARI

n Glodok, a once-bustling hub of electronics stores in north Jakarta, Rudy Kurniawan faces a simple equation. As recently as last June, the small shopowner sold 10 computers a week; he'll be lucky to unload two this month. Although Kurniawan has doubled his prices, the Indonesian rupiah has plunged so drastically in recent weeks that he won't break even. Rent is due in a fortnight--in U.S. dollars. "If it's like this for another two months, we'll close," Kurniawan says, as his five employees listen intently. "If we can't cut a better deal with the landlord, we'll close sooner than that."

Tose's mouth is full of falcon feathers these days. Peregrine crashed to earth last week with no obvious sign that its management had become unfocused. Rather, its collapse was precipitated by an unhedged U.S.-dollar denominated loan of $265 million to a taxicab company in Jakarta: quite a venture for a financial firm with a capital base of only $900 million. The taxi company can't pay its debt because the value of Indonesia's currency, in which local cab fares are denominated, has gone through the ocean floor. At a press conference last week, Tose was unrepentant, scoffing at pundits who call hindsight wisdom. "What happened was a complete meltdown," he insisted, saying further that the collapse of the Indonesian rupiah was something "no one in their right mind would have even factored in."

Five kilometers away in the leafy suburb of Menteng, far more complex calculations were being made last week. As Kurniawan's plight repeated itself across Indonesia, embattled President Suharto confronted his own grim endgame--a currency in free fall, brazen calls for his ouster, the specter of street violence and the subtle displeasure of several powerful allies, including the United States. By Wednesday, when International Monetary Fund chief Michel Camdessus arrived to negotiate conditions for the continuation of the imf's $43 billion bailout of Indonesia's disintegrating economy, Suharto's credibility teetered on the verge of bankruptcy. He responded with equally drastic measures. For the first time, the 76-year-old President agreed specifically to dismantle the infamous system of monopolies, tax breaks and subsidies that has made his business cronies and his six children embarrassingly wealthy. Asia's longest-serving leader appears willing to relinquish part of his empire in order to retain his throne.

The 50-point agreement announced by Suharto and Camdessus strikes directly at the personalized, highly corrupt system that has sustained the President and his closest associates until now. Suharto's youngest son, Hutomo ("Tommy²) Mandala Putra, will lose not only the lucrative monopoly on cloves--used in the country's pungent kretek cigarettes--but also the tax breaks and tariff concessions that have kept alive his faltering "national car" program. Several intimates, including favored eldest daughter Siti Hardiyanti Rukmana, known as "Tutut", have seen some of their cherished infrastructure projects put on hold, and special incentives for the country's aerospace program have ceased. The deal calls for an end to fuel and electricity subsidies and the abolition of state monopolies over all food staples except rice, and the breakup of distribution cartels for paper, plywood and cement. The ludicrous budget estimates that first sent the rupiah reeling a week earlier have been revised to reflect reality more closely: inflation predictions for the year have been adjusted from 9% to 20%, growth is estimated at zero rather than 4%, and an exchange rate of 5,000 rupiah to the dollar is used, rather than 4,000.

But will all of this be enough to stave off financial collapse? The accord met with singular disdain from investors and skepticism from ordinary Indonesians. Jakarta's stock exchange tumbled 4.1% for the day, and the rupiah lost an additional 9% against the dollar (the currency continued to slide on Friday). In part, the pessimism reflects worries about the fortunes of those hurt most by the agreement. Of the $70 billion in foreign debt held by Indonesia's private sector, a significant percentage is thought to be owed by companies owned or controlled by First Family members and Suharto cronies. The accord makes no provision for managing that burden, which could increase dramatically if the property market--in which they are invested heavily--collapses, as many expect. The ensuing corporate defaults would in turn threaten the fragile banking sector. Already some financial institutions have been unable to hand over depositors' money on request, and economists say at least half of the country's 222 banks should be shut down. A meltdown could have international repercussions. Japanese banks alone have lent more than $23 billion to Indonesia.

At the same time, many investors seem to feel that even dramatic gestures are empty at this point. "This was the last potential circuit breaker, but we're a bit past it now," says Jonathan Harris, head of research at hsbc James Capel Securities in Jakarta. "Nothing the imf can say is going to avert the massive unemployment, huge inflation and mass bankruptcies which are coming down in the next six weeks." Unless the rupiah, trading at 8,750 to the dollar at Friday's close, rises to at least 4,500, the country faces widespread and imminent bankruptcies. Many employers are keeping their firms going only until the culmination of the fasting month of Ramadan, when workers traditionally return home to their families for several days. "They are afraid that if they do it before then, the workers will destroy the factories," says union official Aban Rusmawan.

More than 2 million workers were laid off in the last four months of 1997, and millions more are expected to join them in the next few weeks. Even those who have retained their jobs have lost overtime wages, while the costs of staple goods have soared. In the industrial district of Tangerang, on the outskirts of Jakarta, the price of rice has nearly doubled since August, as has the price of cooking oil. "We used to eat chicken," says Sopri, a worker at a Tangerang plastics factory, who supports a wife and two children on the government-mandated minimum wage of 172,500 rupiah a month, currently worth about $20. "Now we eat only rice and vegetables." In three towns in East Java last week, the army quelled riots over the rise in food prices.

For now, few expect such scattered disturbances to topple Suharto's 32-year administration. But the lukewarm reaction to the imf accord suggests that the President's gamble may fail. "The economic situation has been succeeded by the political situation, and it's not going to get much better until that's been resolved," says Harris. Demands that Suharto not accept a seventh term as President in March have become loud and direct. In a fiery speech on Jan. 10, opposition leader Megawati Sukarnoputri openly offered herself as a replacement. The leaders of Indonesia's two main Muslim organizations, the 34-million-member Nahdlatul Ulama and the 28-million-strong Muhammadiyah, have seconded her calls for Suharto to step down. Even the once unthinkable gesture of cutting off his inner circle may no longer satisfy many Indonesians. "They must be prohibited from leaving the country," says Muhammadiyah leader Amien Rais of Suharto's family and cronies. "We will pardon them if they give the money back."

Despite the opposition's apparent unity, however, only the nation's powerful military could conceivably force Suharto out of office, and army brass seem unlikely to attempt that at the moment. Generals loyal to the President hope merely to maintain order until he names a new Vice President--and heir-apparent--in two months. Like shopowner Rudy Kurniawan, however, many Indonesians may not be able to wait that long.

Reported by John Colmey/Singapore and David Liebhold/Jakarta