Is Indonesia on the Brink Once Again? Maybe
By William Pesek Jr., Bloomberg News, 23.01.2003 

Tokyo, Jan. 23 (Bloomberg) -- By now, investors in Asia know what it means when a head of state starts railing against the media -- things are getting desperate. Such is the case with Indonesia, whose economy is as troubled as they come. 

Along with worsening economic statistics, the return of large protests proves the point. Hundreds of students took to the streets of Jakarta this week to protest President Megawati Soekarnoputri's move to raise prices of fuel, electricity and telephone usage. They also called on her to resign, burning flags and tires to make their point. 

A harbinger of things to come in the world's fourth most populous nation? It may very well be, and investors should pay close attention. That's especially true of those reading the 17 percent rise in Indonesian stocks last year as a buy signal. Truth is, Megawati is falling further out of touch with economic problems that undid her three predecessors since 1998. 

Megawati wasted no time in lashing out at the media, accusing journalists of trying to topple her government. ``The job of the press is to show impartiality and reflect justice,'' Megawati said Tuesday, pointing at reporters covering her speech. ``Can you be fair?'' 

Subsidies Removed 
Taking Megawati at her word, one wonders how her policies over the last 18 months exude ``impartiality'' or ``justice.'' Her handling of recent price increases, for example, says much about all that's wrong with Indonesia's economy, which lacks the fairness and integrity Megawati demands from the media. 

The Salim Group and other conglomerates received a controversial New Year's gift from Megawati: a pardon. These groups, mind you, are among those that owe Jakarta over $13 billion in debt from the 1997-1998 Asian financial crisis. They were cleared of past misdeeds, like hording state funds. 

A week later, Megawati removed subsidies that led to higher costs for fuel, electricity, road tolls, bus fares and other goods and services on which Indonesia's poor rely. More than half of Indonesia's 220 million live on less than $2 a day. In a country where over 40 million are unemployed, that hurts. The poor already spend 60 percent of household income on rice alone. 

Megawati's decision to remove subsidies had everything to do with the nation's budget deficit. Ever since the Asian crisis, the International Monetary Fund has been after Jakarta to cut state subsidies to improve its balance sheet. The 2003 budget deficit is estimated at 34.4 trillion rupiah ($3.9 billion), or 1.8 percent of gross domestic product. 

Growing Disenchantment 
But Indonesia needs to find a way to plug the deficit without slamming its increasingly poor masses. Why are well-heeled conglomerates that received tens of trillions of rupiah from state coffers getting pardoned while the poor are asked to make up the difference? If Megawati would repair the economy and reduce poverty, subsidies wouldn't be necessary. 

Even Megawati's about-face on subsidies shows how out of touch she is with her people. With protesters calling for her resignation, Megawati backtracked first on higher telephone charges as a means of helping the poor. Little did she know that vast majority of them don't own phones. They can't afford them. 
To be sure, few in Jakarta think popular outrage will escalate into 1998-like protests and deadly riots. Those toppled former President Suharto, then Asia's longest-serving leader. 

But Megawati should take recent protests for what they are -- growing disenchantment over her economic policies. These are the first significant demonstrations since Megawati became president in July 2001. The incumbent was impeached for incompetence. 

Megawati has a small window of opportunity to put the nation on more stable footing and she's not using it. Runaway inflation through a period of subsidy cuts has hurt impoverished Indonesians the most. 
Investors Scared 

In five years, the price of kerosene, which the poor use for cooking, soared 2.5 times to 700 rupiah a liter. Auto diesel jumped five times to 1,890 rupiah a liter from 380 rupiah a liter in 1998, raising the costs of trucking goods across the archipelago. 

Higher consumer prices mean wages have to keep pace for those who do have steady jobs. The minimum wage tripled in the last five years, leading manufacturers to move to countries such as China and Vietnam. Labor protests are intensifying as workers demand even higher compensation, something that's scaring off investors. Sony Corp., for example, in March will close its only Indonesian factory, firing about 1,000 workers. 
Dodgy corporate governance and the lack of legal recourse also weigh on investors' minds. Megawati, for example, stood silent this week as Indonesia's Supreme Court said it found the three judges, who ruled that Manulife Financial Corp.'s local operations were bankrupt, innocent of all allegations against them. 

The bankruptcy ruling of a company that had plenty of money hurt confidence in a country that needs foreign investors to help spur growth. Following it, the IMF said Indonesia needed to make ``critical'' improvements to its legal system. 

The IMF, the World Bank and 30 multilateral lenders met Indonesian officials in Bali this week and delivered that message in the clearest form since 1998. They said the key to fixing Indonesia's problems was curbing corruption. That's what the poor have been writing on their street banners. Is Megawati listening? Investors should.