INDONESIA ECONOMIC TRENDS 1999
-- SIGNS OF LIFE

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TABLE OF CONTENTS

Summary and Introduction

Overview of the Numbers -- Partial Improvement
Exchange rate
Inflation
Interest rates
Stock market
Oil prices
Investment figures
GDP
Exports
Imports
Rice harvest
Poverty

Economic Issues during the Political Transition
Financial Sector
Banks
Debt
Real Economy
Real sector recovery
Social safety net
Institutional and Legal Issues
Corruption
Legal reform
Regional autonomy

Policy Outlook -- Continuity Expected
Short term
Longer term

Summary

1. Indonesia's troubled economy showed signs of increased stability and reemerging confidence by July 1999. Key economic indicators had improved from 1998 levels. Landmark political events -- the parliamentary campaign and June 7 voting -- went smoothly. Together, these developments gave a sense of light at the end of the tunnel after almost two years of turbulence and economic contraction.

2. Macroeconomic indicators had improved since mid-1998, for both economic and political reasons. on the economic side, close cooperation with international financial institutions paid off. Careful monetary policy allowed inflation and interest rates to decline and the rupiah to strengthen. In addition, international financial support gave the government breathing room on its official debt and supported social safety net programs and bank reform. Abundant rains improved the food situation after the 1997-98 drought and eased rural hardship.

3. On the political side, President Habibie remained firmly in office despite initial speculation that his government would not last, student unrest dissipated in late 1998, laws governing early elections were passed in January 1999, 48 political parties campaigned peacefully in May and June, and parliamentary elections were held successfully. These political achievements helped begin to dissolve the cloud of political uncertainty hanging over Indonesia -- affecting the exchange rate, interest rates, and other factors - since President Soeharto's sudden resignation in May 1998. Starting in April 1999, offshore funds fueled a Jakarta Stock Exchange rally.

4. With a new president and vice president to be selected by late 1999, leading political parties agreed that Indonesia needed to stay on track with its IMF monitored economic reform program. Consensus on this issue meant that anti-inflationary monetary policy was likely to continue, and that the government would move ahead with the expensive-but-crucial bank restructuring program.

5. On the other hand, efforts to restructure the huge overhang of foreign and domestic debts had made little progress. By mid-1999, the overall impression was that Indonesia had achieved enough macroeconomic stability to keep its economy from collapsing further and to boost confidence, but was still moving at a snail's pace in cleaning up the financial damage. The slow pace of banking sector recovery and of corporate debt resolution was attributable in part to the depth of the financial sector's collapse and large number of borrowers and various nationalities of the lenders involved, but also to the lack of a dependable legal environment.

6. Increasingly, political parties, civil society groups and academics were saying that major reform of Indonesia's political and economic systems was needed before sustained economy recovery could be achieved. Simply repairing the damage the economy had suffered during the crisis was not the right answer, these groups said, because the pre-crisis economy favored a small circle of cronies and was fraught with corruption.

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Table of Contents

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