RECENT ECONOMIC REPORTS

ECONOMIC AND FINANCIAL HIGHLIGHTS JULY 2000:
WAITING FOR THE MPR

Summary: President Abdurrahman Wahid’s administration faces tough political and economic challenges over the summer of 2000. Wahid’s political difficulties have drawn the most attention, with all eyes focused on the August 7-18 session of the People's Consultative Assembly (MPR), during which Wahid will present a progress report on the first ten months of his administration. Related attention-getters are the possibility of a cabinet reshuffle after the MPR session, swirling allegations of past and present corruption, and the incarceration of the central bank governor. The Government of Indonesia (GOI) also faces key near-term economic challenges in the implementation of its IMF-supported economic reform program, particularly in the core areas of bank and corporate restructuring. Indonesia is attempting to finalize a third letter of intent (LOI) with the IMF in late July 2000, which would pave the way for the disbursement of another tranche of IMF program funds in August, but important steps remain to be taken before the LOI can be signed. Increased uncertainty on both the political and economic fronts has put pressure on the rupiah, which has depreciated by 23 percent since April 3 and over 40 percent since the currency’s Wahid-administration high of Rp 6705/USD in early November 1999. During the same April-July period interest rates on one-month central bank certificates have risen by over 200 basis points, peaking at 13.11 percent the week of July 10-14. This message uses an exchange rate of Rp 9200/USD for all conversions. End summary.

Lively MPR Session Expected

Indonesia's supreme sovereign body, the People's Consultative Assembly (MPR) comprised of the members of parliament (DPR) and almost 200 appointees representing districts and groups, is scheduled to convene August 7-18. The MPR session promises to be lively. The body is expected to hear President Wahid's progress report on his administration's implementation of the mandate given to him by the October 1999 MPR, which selected him as president and Megawati Sukarnoputri as vice president. Throughout most of June and thus far in July, domestic political commentary has focused on the possible curtailment of President Wahid’s tenure. Political leaders have frequently and vociferously criticized Wahid and his cabinet. The MPR will likely pay particular attention to issues of national reconciliation (Aceh, Papua), the GOI's handling of the violence in the Malukus, progress tackling old corruption cases (see below), and concerns about inappropriate executive branch "interference" in institutions such as the central bank and the armed forces. MPR members will also likely criticize the GOI's implementation of the IMF-supported economic reform program and question both the desirability of having an IMF program as well as specific commitments in the GOI's Memorandum of Economic and Financial Policies to the IMF.

Fancy Footwork on a Cabinet Reshuffle

Most Indonesians expect a major cabinet reshuffle sometime around the MPR session. President Wahid has himself raised the possibility (even though he has also said he was not considering one). Major party leaders have publicly endorsed making changes. Most anticipate that the shuffle will occur after the MPR, although the odd voice has supported not waiting until August, but doing it as soon as possible. If a reshuffle occurs, the two basic questions are: how many portfolios will there be, and who will encumber them? President Wahid has indicated on occasion that he finds the current 35-member cabinet unwieldy. The current cabinet is a "rainbow coalition" representing the parties that supported Wahid and Megawati's selection. The next cabinet could include members of far fewer political stripes.

Bank Indonesia Governor in Detention

After naming Bank Indonesia Governor Syahril Sabirin as a suspect in connection with the 1999 Bank Bali campaign finance scandal on June 5, the Attorney General placed him in detention on June 21. On July 7, the Attorney General announced that he had extended Sabirin’s detention by 40 days until August 20. The decision to detain Sabirin ignited a heated round of criticism, which characterized the move as executive branch interference in the Central Bank's affairs (the Central Bank law that entered into effect in May 1999 establishes Bank Indonesia as an independent institution). A second wave of criticism, rooted in opponents' position that the incarceration was a politically motivated step in a Wahid campaign to oust Sabirin, focused on why Sabirin had been singled out when other actors were considered more responsible for the scandal. The status of investigation into other parties as of late June/early July was:

-- Djoko Tjandra: (executive of PT Era Giat Prima, alleged mastermind of the scheme) currently on trial in Jakarta district court;

-- Setya Novanto (Golkar treasurer): named as a suspect but not yet arrested or indicted;

-- A.A. Baramuli (then Chairman of the Supreme Advisory Council): named as a witness in the case;

-- Tanri Abeng (then State Minister for State-Owned Enterprises): named as a suspect, not yet arrested or indicted;

-- Pande Lubis (then an IBRA deputy): under arrest and awaiting trial.

5. Senior Deputy Governor Anwar Nasution has taken over as Acting Governor. Deputy Governor Subarjo Djojosumarto resigned at the end of June to take up a position at the Southeast Asia Banking Center in Kuala Lumpur.

Economic Program Update

Indonesia and the International Monetary Fund (IMF) signed a Memorandum of Economic and Financial Policies (MEFP) in January 2000 designed to create the conditions for sustained economic recovery in Indonesia. The IMF and GOI agreed on bimonthly program reviews, with the successful completion of each review required before the IMF board authorizes the release of successive tranches of program funds. With a revised MEFP signed on May 17 and the first review successfully completed in early June, the GOI is now grappling with some of the most complex and important reforms specified in the program, particularly in the core areas of bank and corporate restructuring. There have been a number of press announcements in recent weeks of steps taken to comply with IMF program commitments, but important reforms remain incomplete or undone. Under the May MEFP, the next review is scheduled for completion by the end of July.

IBRA Taking Steps

The Indonesian Bank Restructuring Agency (IBRA) is the lead GOI agency on the issue of bank and corporate restructuring. It is also charged with recovering some of the costs associated with the GOI’s huge bank restructuring program. Because of the massive size of these jobs and the large amount of assets under IBRA’s control (face value of over Rp 600 trillion in May 2000), IBRA’s institutional governance is itself an important issue. Responding to a deadline in the IMF-supported program, on June 30 IBRA announced the result of an audit of its activities through December 31, 1999 conducted by Hans Tuanakota Mustofa/Deloitte Touche Tomatsu (HTM/DTT). While the release of the audit is an important step forward, HTM/DTT issued it with a disclaimer opinion based on a number of unresolved legal and financial issues, including:

-- complex ongoing legal actions against a number of former owners of frozen banks, taken-over banks, and recapitalized banks;

-- incomplete verification of the status of approximately Rp 172 trillion (USD 18.8 billion) in Bank Indonesia (BI) liquidity credits issued in 1998 and 1999 to banks now owned by IBRA. This is primarily an issue between the MOF and BI but the outcome will affect IBRA's balance sheet;

-- incomplete verification between IBRA and BI of BI guarantees extended in 1998 and 1999 to banks either controlled by IBRA or already closed down.

Indonesia has also committed to establishing a new governing body for IBRA in order to increase IBRA accountability and speed up decision making. The establishment of the new governing body has been delayed for several weeks due to disagreement over the board’s structure and functions. According to the latest plan, the panel will be established during the week of July 10.

IBRA’s efforts to restructure its portfolio of non-performing loans took a small but important step forward on July 5 when the agency announced that it had nominated Bank Danamon as the winner of a package of mortgage loans with face values under Rp 5 billion (USD 530,000) each. Danamon bid Rp 127.7 billion (USD 13.9 million) for the package of mortgages from 14 frozen banks, an amount equal to 41 percent of the principal value of the loans. IBRA’s nomination of Danamon marked the first time the agency has sold a package of loans outright on a discounted basis. Four previous tranches of commercial loans (Rp 5-50 billion) with a total value of approximately Rp 24.7 trillion (USD 2.7 billion) have been outsourced to banks for collection purposes while IBRA retained portfolio ownership.

The GOI has also committed in the IMF program to publish a schedule of IBRA asset sales. Targets include restructured loans and company shares pledged by former bank owners. On July 13, the financial sector policy committee approved the first sale of a package restructured "corporate-level" (over Rp 50 billion) debts. Coordinating Minister for Economics, Finance, and Industry Kwik Kian Gie told the press that the average recovery rate was 71 percent.

IMF Program Implementation: Bank Restructuring and Recapitalization

Responding again to program deadlines, the GOI completed the recapitalization of the state-owned Bank Negara Indonesia (BNI) and the post-merger taken-over Bank Danamon. On June 30, BI issued a second tranche of recap bonds to BNI valued at Rp 31.8 trillion (USD 3.5 billion). When coupled with the Rp 30 trillion in recap bonds issued to BNI in April, the second tranche brings the total cost of BNI's recapitalization to Rp 61.8 trillion (USD 6.7 billion). After obtaining approval from the Minister of Legal Affairs and Legislation, on June 30 Bank Danamon was merged with eight taken-over banks and issued Rp 28.9 trillion (USD 3.1 billion) in recap bonds. According to a July 1 IBRA press release, the injection of recap bonds gives Danamon a capital adequacy ratio of 32.5 percent. The successful recapitalization of BNI and Bank Danamon leaves only two significant Indonesian banks yet to be recapitalized: Bank Bali and state-owned Bank Rakyat Indonesia (BRI). IBRA and Bank Bali had been embroiled in an extended legal dispute over IBRA's right to have taken the bank over. A court had ruled in Bank Bali's favor. On July 13, the financial sector policy committee decided to return custody of Bank Bali to Bank Indonesia. BRI’s recapitalization continues to be delayed by disagreement over a new management team for the bank.

IMF Program Implementation: Corporate Debt

Reducing or eliminating Indonesia’s huge corporate debt overhang is a precondition for restarting sustainable economic growth in the country. Because of the massive volume of corporate assets it controls, IBRA is the key player in the GOI’s efforts to restructure corporate debt. The agency’s short-term strategic goal is to restructure 35 percent of the obligations of the top 21 IBRA debtors. IBRA released data on July 4 showing Rp 23.4 trillion (USD 2.5 billion) of the 87.4 trillion (USD 9.5 billion) in obligations of the top 21 debtors had reached stage six ("finalized restructuring proposal") of the loan restructuring process. According to IBRA, Rp 1.5 trillion (USD 158 million) in loans had advanced beyond stage six (to implementation of the restructuring proposal or fully paid) while some Rp 6.9 trillion in loans (USD 726 million) were being resolved through litigation. When totalled these figures just reach the 35 percent level set by IBRA. As of mid-July, there was little information available about the character of the individual restructuring deals or a schedule for litigation.

In addition to IBRA, two other institutions play important roles in restructuring corporate debt: the Jakarta Initiative Task Force (JITF), a mediation body with the lead in cases where IBRA is not the majority creditor, and the commercial (bankruptcy) courts. The JITF has been criticized for a lack of results, but in May 2000 the GOI issued new regulations giving the organization significantly increased powers. Under new time-bound mediation procedures set out in the regulations, once a party requests JITF involvement, a JITF-appointed mediator has the power to summon the parties to a dispute and impose a timetable for conducting negotiations. If negotiations fail, the JITF is required to refer the case to the Financial Sector Policy Committee, the ministerial-level body that sets overall financial policy in Indonesia. While these regulations are as yet untested, the Financial Sector Policy Committee has referred three high-profile cases representing USD 2.75 billion in indebtedness to the JITF for time-bound mediation. According to the JITF, 37 cases with a total indebtedness of USD 5 billion have come to the JITF from the market, most of which have been referred by debtors.

Indonesia’s Commercial (bankruptcy) Courts have been an obstacle to corporate restructuring, and the GOI has not yet won a case brought before that body. To improve the functioning of the court, the GOI committed to appoint ad hoc judges to hear bankruptcy cases, a move the court resisted. The Justice Minister was recently quoted saying that the GOI intended to submit a new bankruptcy bill to parliament that allows for the publishing of dissenting opinions. A bankruptcy court judge reportedly said on July 6 that technical and procedural issues on ad hoc judges should be worked out by August. He also said a recent Supreme Court decree would permit the Commercial Court to publish dissenting opinions until the bankruptcy law amendment is approved.

Jakarta Stock Exchange Adopts Two-Board System

On June 30, the Jakarta Stock Exchange (JSX) announced that it was adopting a two-board listing system effective July 3 under which 145 companies, including a number of very well known local firms, were placed on a new "development board." The remainder of the 285 companies listed on the JSX was retained on the main board. Analysts believed the new JSX structure would give a boost to the credibility of the JSX and help attract new investors. Companies moved to the development board had either failed a test of corporate governance or had run aground of one or more of the following financial conditions:

--failing to post a profit over the past three consecutive years;

--failing to pay dividends over the past three consecutive years;

--having paid up capital of less than Rp 3 billion (USD 325,000);

--having less than 100 shareholders over the past three months;

--being declared bankrupt by a commercial court;

--having a disclaimer opinion from a commercial auditor.

Budget News

The government has stated that domestic fuel price hikes, postponed from the April 1 start of the current nine-month fiscal year, will be introduced in October, along with a mechanism to shield the poor from its effects. There is concern that spending and revenue projections in the FY 2000 budget will have to be revised because of the recent depreciation of the rupiah (see final section of this report). Sustained high world oil prices, however, are helping on the revenue side and at current import and domestic consumption levels are a net budgetary gain despite the higher domestic fuel subsidy cost that accompanies higher world oil prices. A prominent budget issue involves heightened GOI efforts to capture off budget revenue, a process that has yet to bear significant fruit. The FY 2001 budget is to be sent to the DPR in late September/early October. It is slated to incorporate politically sensitive items such as fuel price hikes, budget support to the national electricity company PLN, and bank recapitalization carrying costs. It will be the first budget reflecting the 1999 fiscal balance (decentralization) law, with all its associated issues, such as civil service reform and personnel dispersion, sharing of natural resource-derived revenues, and fair shares of other revenues for non-resource-rich provinces and regencies.

Corruption Update

Audit Mania

To set the stage for future accountability, the GOI has undertaken a number of high-profile audits, including the following (in addition to the end-1999 audit of IBRA described above):

-- Bank Indonesia (BI): on June 19, the local press carried BI's 1999 financial statement as audited by the supreme audit board (BPK). BPK issued a qualified opinion due to remaining questions about outstanding Bank Indonesia liquidity credits ("BLBI's"). Separate audits of BLBI's are under way).

-- reforestation fund: the Ministry of Finance commissioned an international accounting firm to audit the reforestation fund. Indonesia’s IMF-supported program states that the audit results will be released to the public, but this has not yet occurred.

-- state-owned enterprises and agencies: audits of the national logistics agency Bulog, national oil company Pertamina, and national electricity company PLN were completed and corrective actions are reportedly underway. According to the GOI, audits of the national airline Garuda, the national toll road company, the domestic telecommunications company, the largest public port corporation, and a major state plantation have been initiated and will be completed by the end of 2000.

Meanwhile, the government's internal audit agency, known as the Development and Finance Control Agency ("BPKP") is also conducting audits. On June 27, the BPKP chairman testified before parliament on the results of its annual audits of government agencies. The report listed 10 government ministries or agencies in which auditors uncovered evidence of financial irregularities or possible KKN. Heading the "top ten list" was Pertamina, where BPKP identified 212 cases of irregularities, totaling over Rp 1 trillion, such as deviation from normal procedures, payments for fictitious work or unjustified mark-ups. It was not clear how BPKP's audit of Pertamina differed from earlier audits or if it reflected the efforts underway since mid-1998 to correct some of the problems identified after former President Soeharto resigned. Other agencies named in the BPKP report were the Ministry of Investment and State-Owned Enterprise (87 cases totaling Rp 630 billion); Bulog (17 cases totaling Rp 213 billion) and the Family Planning Agency (4 cases totaling Rp 70 billion).

Soeharto Corruption Case

On May 29, Attorney General Marzuki Darusman placed former president Soeharto under house arrest (he had previously been confined to the city). Earlier, on May 19, Darusman had announced that he hoped to establish the date of Soeharto's trial by early August. On June 2, Soeharto's lawyers filed suit against the Attorney General challenging his decision last December to revoke the October 11, 1999 decision of his predecessor to clear Soeharto of corruption charges, claiming prosecutors had uncovered no evidence that the government had suffered a financial loss as a result of the former president's actions. Soeharto's attorneys argued that Darusman did not have authority to revoke the earlier decree and reinstate the investigation of their client. However, the Jakarta District Court dismissed this suit on June 9, ruling that only prosecutors, investigators or "third parties" had the right to challenge such a decision. Soeharto, the court ruled, was not a third party in this case. The attorney general's investigation into Soeharto-sponsored charitable foundations continues, with continuing questioning of daughter Siti Hardijanti Hastuti ("tutut") and other family members. Local pundits predictably wondered if there was a connection between questioning of Hutomo Mandala Putri (Tommy Soeharto) and July 4 bomb explosions at the attorney general's office.

In the meantime, on June 6, the Central Jakarta District Court found in favor of Time Magazine in the defamation suit Soeharto had filed in response to Time's May 1999 article discussing his wealth. The article estimated Soeharto's wealth at USD 25 billion. Soeharto had asked for USD 1 billion in damages. The court agreed with the primary defense that the article, which reported on a public figure, was in the public interest, and additional arguments that at the time of the article Soeharto had no reputation left to defame and that time had reported in an objective manner.

President Wahid told a New York audience on June 13 that he had appointed Minister of Mines and Energy Bambang Yudhoyono to act as an intermediary with the Soeharto family on the delicate issue of returning some of their wealth to the nation. On June 27, Yudhoyono explained to the DPR that his role was not a negotiator but a "communicator" between the President and the Soeharto family. Wahid has, at other times, put a figure of as much as USD 45 billion on the Soeharto family's wealth.

On July 1, Defense Minister Juwono Sudarsono accused Soeharto and unnamed figures close to him, of using their wealth to stir up violence and unrest throughout Indonesia. In an interview with the weekly "tempo", Sudarsono said he had observed that each time corruption investigators got close to Soeharto or to former high government officials, there were violent disturbances somewhere in the country.

Texmaco Case

The attorney general issued a letter closing the Texmaco investigation on May 19. He announced, and later testified to parliament, that his office had not been able to uncover evidence of significant financial loss to the state. The investigation could be re-opened if new evidence emerges. IBRA spokesmen, former State Minister for Investment and State-owned Enterprises Laksamana Sukardi (who had first broken the Texmaco scandal in November 1999), and Indonesian Corruption Watch (ICW) head Teten Mazduki were among those quoted in the press taking issue with the decision to close the investigation and with the reason cited. Laksamana and Mazduki, among others, pledged to bring additional evidence to the Ag's office. The inference was that the decision to close the case had been politically (or, worse, venally) motivated.

Buloggate etc.

As the August session of the MPR approaches, a mounting wave of corruption allegations has surrounded the current government. Allegations of misconduct are tailor-made for Indonesia's current political atmosphere, which thrives on rumor and innuendo and in which the public, the press, the DPR, and some members of government are enthusiastically exercising their right of free speech. As President, Wahid is attracting the most potshots as opposing political forces jockey for position. Prominent examples of accusations involving the palace are:

-- Buloggate: this scandal involves solicitation of Rp 35 billion (about USD 4.1 million) from an employees' fund of the state logistics agency (Bulog). Acting State Secretary Bondan Gunawan resigned on may 25 claiming his innocence in the affair but saying he did not want to remain in office only to serve as a target for those seeking to attack the President on this issue.

-- Bruneigate: the Sultan of Brunei extended USD 2 million to President Wahid. The money was reported to be for humanitarian relief in Aceh but, as of now, there has been no satisfactory explanation of exactly what the money was used for. Officials in Aceh claimed they never received it.

-- Bukaka: a political storm has erupted over charges of improper influence in the cancellation of a tender put out by the state electricity company (PLN) to construct substations for the long-awaited southern (Java) electricity transmission line. The original contract was won by Bukaka, a firm associated with former Industry and Trade Minister Jusuf Kalla (fired in late April along with Laksamana Sukardi). To many the sudden cancellation of the tender closely resembled Soeharto-era practices when out-of-favor politicians abruptly found their government connections drying up and contracts transferred to new favorites. Bukaka denies any wrong doing and announced on July 12 that it would have to lay off some 5000 employees as a result of the cancellation.

Anti-Corruption Efforts in the DPR

At the same time the DPR itself is not immune from attack. On July 7, the parliament approved the names of 45 members of a new commission to audit the assets of senior government officials. The commission was established under law no. 28/1999 and was to have been set up last February. Almost immediately anti-corruption activists, some legislators, and the press attacked both the way the appointments were made and, in some cases, the individuals named. The critics charged that the most prominent anti-corruption activists on the original list of 204 candidates were not invited for the final stage of the fit and proper test and were in many cases replaced on the list by individuals with close ties to one or another political party. Indonesian corruption watch charged that with so many political figures on the commission it would inevitably run into conflicts of interest in doing its work. Others criticized the process by which the DPR ratified the names claiming that only 58 parliament members were actually present when the vote was taken. DPR chairman Akbar Tanjung said the process conformed to the DPR's procedural rules.

Economic Indicators Unsettled

Exchange Rate

In late June-early July 2000, increased political and economic uncertainty damaged market confidence and drove the rupiah sharply lower. BI spokesmen have periodically stated that the Central Bank will not intervene. The rupiah closed at 9350/USD on July 5, a decline of over eight percent since its Rp 8650/USD close on June 29. The currency has depreciated over 40 percent since the currency’s Wahid-administration high of Rp 6705/USD in early November 1999. Most analysts believe that if the rupiah recovers relatively promptly so that it can achieve an average exchange rate of Rp 8000/usd for the year 2000, damage to Indonesia’s economy will be limited. On the other hand, if the rupiah fails to recover promptly or weakens further, the GOI may be forced to revise some macroeconomic and budget targets. The FY 2000 budget assumed an average exchange rate of Rp 7000/USD.

Source: CNBC

Interest Rates

Increased political and economic uncertainty is also affecting the market for Bank Indonesia Certificates (SBI’s) and pushing interest rates higher. At BI’s July 12 weekly auction, the weighted average interest rate for one-month SBI’s rose to 13.11, an increase of 137 basis points since political tensions intensified the week of June 21. After a period of stability earlier in the year, interest rates on SBI's have risen nine consecutive weeks from May 17 to July 12, for a cumulative increase of 212 basis points.

Weekly SBI Auctions

Source: Bank Indonesia

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