TIME Asia | Prince of Angry Tides

OUTCAST OF THE ISLANDS: Suharto's apparent boost for a subsidy-prone crony to be his No. 2 batters the rupiah anew and raises the specter of turmoil	ASIA	February 2, 1998 VOL. 151 NO. 4
Prince of Angry Tides As Suharto hints at passing Indonesia's torch, the archipelago looks increasingly like a tinderbox By NISID HAJARI n times of fire and riot, Sukarno, modern Indonesia's velvet-tongued founder, liked to boast that his countrymen would "eat stones if I told them to." His nation's only other President, 76-year-old Suharto, fancies himself more plainspoken. He emphasizes his peasant roots when addressing the poor who form the backbone of the world's fourth-largest population (202 million) and adopts the studied indirection of Javanese kings when engaging in Jakarta's court politics. Last week, however, hardly anyone within or without Suharto's nervous archipelago was swallowing what he had to say. He didn't need to say much. With a simple, "Ya," the silver-haired leader on Tuesday accepted his ruling Golkar party's nomination for a seventh five-year term. Following the nomination meeting, party chairman Harmoko announced 14 new criteria it would use to select a vice president. No. 4, "a mastery of science and technology," pricked ears across the globe: the phrase seemed to anoint as Suharto's heir-apparent the country's Research and Technology Minister B. J. Habibie, 61, a Suharto protege whose implausible ambitions have long made him one of Indonesia's most controversial figures. With that apparent decision, the Indonesian currency resumed its precipitous decline; by late Thursday morning, the rupiah had sunk to 16,500 to the dollar, about 15% of its value only six months earlier. Suharto's terse declarations virtually guarantee turmoil in the weeks ahead. "Indonesia is like a forest after a long drought," says newspaper publisher Aristides Katoppo. "The smallest spark could set off the blaze." Jakarta's central bank had to fight against such a possibility on Thursday, buying rupiah until the currency stabilized at around 12,000 to the dollar. But the initial sell-off spooked bourses from Manila to Tokyo, and the bloodletting continued. The rupiah hit 15,250 on Friday, before ending the week at a still dismal 13,750. At such rates few Indonesian companies can pay the interest on their foreign loans--never mind the principal--and the murkiness of their obligations has stymied officials seeking to reschedule at least a portion of the $70 billion debt. The squeeze has effectively paralyzed the economy. Shopowners report that the chain of credit leading from manufacturer to consumer has been frozen; in many cases distribution has also ground to a halt, so that stores may have to close when their stock runs out. Many retailers reported declines in business in January, normally their most profitable month, of up to 60%. Desperate firms last week were even offering to repay their dollar-denominated debt in rupiah, at discounted exchange rates."If you wanted to paint a worst-case scenario for Indonesia," says Jonathan Harris, head of research at hsbc James Capel in Jakarta, "putting Habibie in as Vice President is a good place to start." For Habibie, a loquacious Sulawesi native who has known Suharto since the early 1950s, such an appointment would cap a meteoric rise. Educated at Indonesia's prestigious Bandung Institute of Technology and the Technische Hochschule at Aachen, Germany, Habibie worked as vice president of applied technology at the aircraft firm Messerschmitt-Bolkow-Blohm before being recalled to Jakarta by the President in 1974. "You can do whatever you want here short of fomenting a revolution," Suharto promised the young engineer. Habibie chose to build a nearly unassailable power base: he has held his current ministerial post, created specifically for him, for 20 years. In 1976 he became director of the state aircraft company iptn and two years later took over 10 other "strategic ventures" that have afforded him unparalleled influence. Although his struggle to establish an aerospace industry has consumed billions in government funds and produced only one indigenous, propeller-driven model that has yet to be certified, Suharto supported the project until this month's second IMF agreement torpedoed the subsidies. After the President installed Habibie as head of the influential Indonesian Association of Muslim Intellectuals in 1990, observers acknowledged him as probably the second-most powerful man in Indonesia. That distinction has won him many enemies. The generals resent his control over arms purchases, particularly after Habibie spent millions to acquire much of the leaky East German navy in 1994. The influential Chinese and Christian minorities are suspicious of his Muslim rhetoric--sharper behind closed doors than in public, according to those who know him well. His economic theories, meanwhile, are viewed with outright alarm by government technocrats. Habibie's insistence that high inflation demands lower interest rates flies in the face of accepted economic doctrine. But Suharto himself has often endorsed his protege's calls for Indonesia to accelerate beyond the unglamorous industrial stage of sewing tennis shoes and tapping palm oil, and to graduate immediately to flashy high-tech sectors--with liberal help from government subsidies. The theory runs precisely counter to IMF prescriptions for Indonesia. "He is considered a big-spending, statist kind of guy in a world where that theory has been refuted,'' says Hong Kong-based economist Tim Condon. That view may partly explain Suharto's apparent decision. "I think he wants to balance the technocrats with somebody else," says newspaper editor Gunawan Muhamad, noting the recent prominence of IMF-friendly officials like economic adviser Wijoyo Nitisastro. Habibie's first loyalty is to Suharto, who often portrays himself as a father figure to the younger man; few other candidates would be as inclined to defend the First Family's vast business empires. The engineer, Suharto says warmly in his autobiography, "is not a man who thinks he knows best." U.S. officials are not convinced that Habibie even ranks as an heir yet: Jakarta pundits speculate that Suharto, a consummate puppetmaster, may be floating his name to throw the military off-guard. The armed forces are thought to have ruled out other oft-mentioned candidates to succeed Suharto, including the President's son-in-law Maj. Gen. Prabowo Subianto and Army Chief of Staff Gen. Wiranto (both considered too young), incumbent Vice President Try Sutrisno (too weak) and Suharto's eldest daughter Siti Hardiyanti Rukmana (too inexperienced). But other than retired general Rudini, a former Army Chief of Staff and Home Affairs Minister with a clean reputation, the military has so far found few alternatives. As the possibility of social unrest grows, the many officers appointed by Suharto are unlikely to oppose the President right now. They face a slippery enemy, however. "This is a rebellion of the middle class," says Budiman. "They are not using weapons. They're just taking their capital away. Suharto and the military don't know how to deal with this." So far the twin pillars of the Indonesian state have maintained calm with traditional means: troops have quelled scattered food riots, and Jakarta police have imported an extra 14,000 agents in advance of this week's Lebaran festival marking the end of the fasting month of Ramadan. Suharto has also offered carrots as well as sticks. The National Logistics Agency has flooded the market with cheap rice, sugar and cooking oil to hold prices down, while other departments have initiated public-works programs to enlist some of Indonesia's 7 million unemployed in digging canals and clearing ditches. Last week the Transport Ministry even slashed the price of economy-class train tickets by 70% to help workers return home for the holiday, where authorities hope they will remain after an expected wave of factory closings puts many of them out of work. Such gestures, though, betray the government's deep anxiety. The most recent IMF plan calls for Jakarta to relinquish state control over all foodstuffs other than rice on Feb. 1, and observers fear unrest as millions of newly laid-off workers return after Lebaran to the archipelago's tense, steamy cities. In interviews, Habibie likes to recall the days when he was known as "Mr. Crack" for his mastery of something called crack propagation theory--an attempt to calculate how far and wide a fracture in building material will spread under pressure. But in Indonesia right now, it hardly takes an engineer to realize that the walls are crumbling. Reported by John Colmey/Singapore, David Liebhold/Jakarta and Douglas Waller/Washington
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As Suharto hints at passing Indonesia's torch, the archipelago looks increasingly like a tinderbox

By NISID HAJARI

n times of fire and riot, Sukarno, modern Indonesia's velvet-tongued founder, liked to boast that his countrymen would "eat stones if I told them to." His nation's only other President, 76-year-old Suharto, fancies himself more plainspoken. He emphasizes his peasant roots when addressing the poor who form the backbone of the world's fourth-largest population (202 million) and adopts the studied indirection of Javanese kings when engaging in Jakarta's court politics. Last week, however, hardly anyone within or without Suharto's nervous archipelago was swallowing what he had to say.

He didn't need to say much. With a simple, "Ya," the silver-haired leader on Tuesday accepted his ruling Golkar party's nomination for a seventh five-year term. Following the nomination meeting, party chairman Harmoko announced 14 new criteria it would use to select a vice president. No. 4, "a mastery of science and technology," pricked ears across the globe: the phrase seemed to anoint as Suharto's heir-apparent the country's Research and Technology Minister B. J. Habibie, 61, a Suharto protege whose implausible ambitions have long made him one of Indonesia's most controversial figures. With that apparent decision, the Indonesian currency resumed its precipitous decline; by late Thursday morning, the rupiah had sunk to 16,500 to the dollar, about 15% of its value only six months earlier. Suharto's terse declarations virtually guarantee turmoil in the weeks ahead. "Indonesia is like a forest after a long drought," says newspaper publisher Aristides Katoppo. "The smallest spark could set off the blaze."

Jakarta's central bank had to fight against such a possibility on Thursday, buying rupiah until the currency stabilized at around 12,000 to the dollar. But the initial sell-off spooked bourses from Manila to Tokyo, and the bloodletting continued. The rupiah hit 15,250 on Friday, before ending the week at a still dismal 13,750. At such rates few Indonesian companies can pay the interest on their foreign loans--never mind the principal--and the murkiness of their obligations has stymied officials seeking to reschedule at least a portion of the $70 billion debt. The squeeze has effectively paralyzed the economy. Shopowners report that the chain of credit leading from manufacturer to consumer has been frozen; in many cases distribution has also ground to a halt, so that stores may have to close when their stock runs out. Many retailers reported declines in business in January, normally their most profitable month, of up to 60%. Desperate firms last week were even offering to repay their dollar-denominated debt in rupiah, at discounted exchange rates."If you wanted to paint a worst-case scenario for Indonesia," says Jonathan Harris, head of research at hsbc James Capel in Jakarta, "putting Habibie in as Vice President is a good place to start."

For Habibie, a loquacious Sulawesi native who has known Suharto since the early 1950s, such an appointment would cap a meteoric rise. Educated at Indonesia's prestigious Bandung Institute of Technology and the Technische Hochschule at Aachen, Germany, Habibie worked as vice president of applied technology at the aircraft firm Messerschmitt-Bolkow-Blohm before being recalled to Jakarta by the President in 1974. "You can do whatever you want here short of fomenting a revolution," Suharto promised the young engineer. Habibie chose to build a nearly unassailable power base: he has held his current ministerial post, created specifically for him, for 20 years. In 1976 he became director of the state aircraft company iptn and two years later took over 10 other "strategic ventures" that have afforded him unparalleled influence. Although his struggle to establish an aerospace industry has consumed billions in government funds and produced only one indigenous, propeller-driven model that has yet to be certified, Suharto supported the project until this month's second IMF agreement torpedoed the subsidies. After the President installed Habibie as head of the influential Indonesian Association of Muslim Intellectuals in 1990, observers acknowledged him as probably the second-most powerful man in Indonesia.

That distinction has won him many enemies. The generals resent his control over arms purchases, particularly after Habibie spent millions to acquire much of the leaky East German navy in 1994. The influential Chinese and Christian minorities are suspicious of his Muslim rhetoric--sharper behind closed doors than in public, according to those who know him well. His economic theories, meanwhile, are viewed with outright alarm by government technocrats. Habibie's insistence that high inflation demands lower interest rates flies in the face of accepted economic doctrine. But Suharto himself has often endorsed his protege's calls for Indonesia to accelerate beyond the unglamorous industrial stage of sewing tennis shoes and tapping palm oil, and to graduate immediately to flashy high-tech sectors--with liberal help from government subsidies. The theory runs precisely counter to IMF prescriptions for Indonesia. "He is considered a big-spending, statist kind of guy in a world where that theory has been refuted,'' says Hong Kong-based economist Tim Condon.

That view may partly explain Suharto's apparent decision. "I think he wants to balance the technocrats with somebody else," says newspaper editor Gunawan Muhamad, noting the recent prominence of IMF-friendly officials like economic adviser Wijoyo Nitisastro. Habibie's first loyalty is to Suharto, who often portrays himself as a father figure to the younger man; few other candidates would be as inclined to defend the First Family's vast business empires. The engineer, Suharto says warmly in his autobiography, "is not a man who thinks he knows best." U.S. officials are not convinced that Habibie even ranks as an heir yet: Jakarta pundits speculate that Suharto, a consummate puppetmaster, may be floating his name to throw the military off-guard.

The armed forces are thought to have ruled out other oft-mentioned candidates to succeed Suharto, including the President's son-in-law Maj. Gen. Prabowo Subianto and Army Chief of Staff Gen. Wiranto (both considered too young), incumbent Vice President Try Sutrisno (too weak) and Suharto's eldest daughter Siti Hardiyanti Rukmana (too inexperienced). But other than retired general Rudini, a former Army Chief of Staff and Home Affairs Minister with a clean reputation, the military has so far found few alternatives. As the possibility of social unrest grows, the many officers appointed by Suharto are unlikely to oppose the President right now.

They face a slippery enemy, however. "This is a rebellion of the middle class," says Budiman. "They are not using weapons. They're just taking their capital away. Suharto and the military don't know how to deal with this." So far the twin pillars of the Indonesian state have maintained calm with traditional means: troops have quelled scattered food riots, and Jakarta police have imported an extra 14,000 agents in advance of this week's Lebaran festival marking the end of the fasting month of Ramadan. Suharto has also offered carrots as well as sticks. The National Logistics Agency has flooded the market with cheap rice, sugar and cooking oil to hold prices down, while other departments have initiated public-works programs to enlist some of Indonesia's 7 million unemployed in digging canals and clearing ditches.

Last week the Transport Ministry even slashed the price of economy-class train tickets by 70% to help workers return home for the holiday, where authorities hope they will remain after an expected wave of factory closings puts many of them out of work. Such gestures, though, betray the government's deep anxiety. The most recent IMF plan calls for Jakarta to relinquish state control over all foodstuffs other than rice on Feb. 1, and observers fear unrest as millions of newly laid-off workers return after Lebaran to the archipelago's tense, steamy cities. In interviews, Habibie likes to recall the days when he was known as "Mr. Crack" for his mastery of something called crack propagation theory--an attempt to calculate how far and wide a fracture in building material will spread under pressure. But in Indonesia right now, it hardly takes an engineer to realize that the walls are crumbling.

Reported by John Colmey/Singapore, David Liebhold/Jakarta and Douglas Waller/Washington