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Gloomy forecast for Indonesia causes worry

By PRAGINANTO
THE NIKKEI WEEKLY

JAKARTA -- The Indonesian economy, reeling from soaring inflation and skyrocketing unemployment, appears headed for another dismal year, sparking fears that a new round of bloody riots could erupt at any time.

Adding to the gloomy outlook is the government's anaemic budget, which many analysts say is still too optimistic.

The economic crisis has forced some companies to lay off millions of workers and caused poverty to soar in the nation of 202 million.

By the end of last year, unemployment had risen from 13 million a year earlier to 20 million, or about one-fourth of the work force. The number of people living below the poverty line soared from 27 million to 80 million.

"The number of unemployed will jump to between 29 million and 32 million," said Mr Bomer Pasaribu, director of the Centre for Labour and Development Studies, a Jakarta-based private think-tank.

Analysts and politicians have warned that soaring unemployment and poverty is practically unavoidable, and will exacerbate political tension as there are almost no indications of economic growth in sight.

Ethnic Chinese are particularly worried about the prospect of renewed rioting and looting, of which they were a primary target last year. They make up less than 5 per cent of Indonesians, but their major presence in the private sector has fuelled resentment among the indigenous pribumi population.

Some fear the general election scheduled for June will heighten tensions in Indonesia and give rise to anti-Chinese sentiment.

ANTI-CHINESE RIOTS AT POLLS? "WE ARE very scared the election will lead to bloody anti-Chinese riots, and many of us have already closed down our businesses or will soon do so," an ethnic Chinese businessman said.

Indonesia's gross domestic product (GDP) shrank 13.6 per cent year on year in the 1998 calendar year to 374.7 trillion rupiah (S$78 billion), the State Statistics Agency reported.

A report by the World Bank predicted Indonesia's GDP would shrink 10 to 16 per cent in the fiscal year ending March 31 and remain stagnant in fiscal 1999. The economy will resume growth in fiscal 2000, it predicted.

Businesses are troubled by the high interest rates the government has kept in place for more than a year. The one-month deposit rate, for instance, hovers around 45 per cent -- impossibly high for some companies.

Investment is one of the biggest victims of the high interest rates. Investment projects approved by the government last year declined by more than 50 per cent from a year earlier. Foreign investment plunged 60 per cent to about US$13.2 billion last year, while domestic investment fell 51 per cent to 59 trillion rupiah.

Tax incentives used by the government to attract foreign investment appear to be having little drawing power. Seagate Technology Corp. of the US, a leading maker of computer hard-disk drives, cancelled its plan to build a production facility in Indonesia last year, opting instead for the Subic Bay freeport area north-west of Manila in the Philippines.

"More investors will cancel their investment plans this year," said an official at the Indonesia Chamber of Trade & Industry.

Also hurting the economy is the inability of exporters to take full advantage of the positive effects of the rupiah's plunge against the dollar. The weakened currency provides an opportunity for non-oil exporters to enjoy greater business; but many manufacturers must import materials before exporting finished goods, and as many cannot afford to do so, they are unable to make their products.

Letters of credit issued by Indonesian banks are rejected by most overseas banks.

Non-oil exports in the January-October period last year decreased to US$34.388 billion from US$34.462 billion in the same period the previous year.

"Many buyers have shifted their orders from Indonesia to other countries, because they lack confidence that we will survive amid the prolonged economic and political crises," said Mr Djimanto, secretary-general of the Indonesian Footwear Association.

Since the currency crisis hit in July 1997, the rupiah has plunged more than 80 per cent against the dollar, to around 8,000.

The country also faces mounting debts. Finance Minister Bambang Subianto told Parliament recently Indonesia's debt-service ratio, the proportion of debt service to export earnings, could reach almost 50 per cent this year.

"Exports are expected to reach US$55 billion next year, while debt service will be US$27 billion," he said.

Bank Indonesia, the central bank, said Indonesia's total external debt reached about US$145 billion at the end of last year, compared with US$131 billion a year earlier.

Undermining the government's fund-raising ability are low oil prices, which have plunged nearly 30 per cent to about US$10 per barrel since the middle of last year. Oil exports accounted for about one-fourth of total exports last year.

The steep fall in oil prices played a dominant role in the government's slashing of its budget for the next fiscal year starting April 1. The draft budget unveiled by President B.J. Habibie last week totalled 218.3 trillion rupiah, 17.3 per cent lower than the current budget.

Projected revenues from oil and gas exports were scaled back to 20.9 trillion rupiah from the current 49.7 trillion rupiah.

The new budget uses an exchange rate of 7,500 rupiah to the dollar and prices oil at US$10.5 per barrel.

"The inability of the government to boost its budget will worsen the economic situation, since we cannot rely on the private sector to ease the crisis because the sector is still under strong pressure from the high interest rates and huge debt," said Mr Umar Juoro, chief economist at the Centre for Information and Development Studies, a private think-tank based in Jakarta.

Many economists regard the draft budget as too optimistic. The government expects income tax revenues to jump 57.2 per cent to 40.6 trillion rupiah in the next fiscal year.

The government also expects to earn 29 trillion rupiah by selling assets belonging to private banks that are either closed or nationalised, and from the privatisation of state-owned companies.

"I worry that if the revenues fall short of the target, the government will print money -- and that will certainly cause prices to soar," said Mr Anggito Abimanyu, an economics instructor at Gajah Mada University in JogJakarta.

The government is predicting 17 per cent inflation next fiscal year, much lower than last year's 77.6 per cent. Many analysts regard this forecast as unrealistic, particularly since the government will end subsidies for food, medicine and fuel next year.

Price hikes are a major source of discontent in Indonesia.

BRINK OF 'BLOODY REVOLUTION' "BRING down prices!" was one of the most commonly heard chants during the anti-government protests leading to the fall of former President Suharto and his predecessor, Sukarno.

Some leaders of Islamic organisations have warned that the riots could lead to a social revolution if the country's competing top political leaders fail to work together.

"There is no doubt Indonesia is on the brink of a bloody revolution," said Mr Abdurrahman Wahid, the charismatic leader of the 30-million-member-strong Nabdatul Ulama, Indonesia's largest Muslim organisation.

He said to prevent deep social rifts, a meeting must be held between President Habibie, as a civilian representative; General Wiranto, representing the armed forces; and Suharto, who still wields considerable power.

"Frequent riots and mysterious killings of hundreds of Nahdatul Ulama members and supporters in East Java province last year were caused by political rivalries,"' Mr Wahid said.

President Habibie turned down the meeting. "Indonesia has constitutional bodies, such as Parliament and the People's Consultative Assembly, that can be used to solve political problems," he said.

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