Bulletin of Indonesian Economic Studies Vol 36 No 1, April 2000, pp.

13–44

SURVEY OF RECENT DEVELOPMENTS

George Fane

Australian National University

SUMMARY
GDP grew slowly but steadily during 1999, thus confirming that Indonesia
is at last recovering, although more slowly than the other countries most
affected by the Asian crisis. Growth in 2000 is officially forecast at 3–4%.
With the effects of discretionary fiscal policies included, inflation during
2000 is expected to be in the range 5–8%, compared with 2% during 1999.
Indonesia’s sluggish output growth is probably due mainly to delays
in restructuring the banking sector and resolving corporate debts. About
80% of the Rp 639 trillion of government bonds needed to recapitalise
the banks has now been issued. However, with capital–asset ratios of
only 4%, and assets dominated by illiquid bond holdings, the banks
appear fragile.
The meeting of the Consultative Group on Indonesia promised new
official loans of $4.7 billion. In addition, Indonesia signed a new agreement
with the IMF that raises the total amount of its promised loan from $11
billion to $16 billion.
The policies to be followed under the new IMF agreement continue
to emphasise the avoidance of money creation as a way of financing the
budget deficits that will result from the interest payments on the
government’s greatly increased debts. The government has unveiled new
initiatives to deal with judicial corruption, and hopes that they will
improve the workings of the bankruptcy law and hence the restructuring
of corporate debt.
More important than any economic event was the civilian govern-
ment’s assertion of its dominance over the military, at least for the time
being. Following the finding by the National Commission on Human
Rights that General Wiranto should be held accountable for the ‘planned
and systematic violence’ in East Timor, the President forced him out of
the cabinet.
14 George Fane

MACROECONOMIC DEVELOPMENTS
The massive fall in GDP—which was 13.7% lower in 1998 than in 1997—
has been arrested, and a sluggish recovery has now been sustained since
the fourth quarter (Q4) of 1998. However, because of the collapse of
exports, fixed investment and stock accumulation during 1998, GDP in
Q1 of 1999 was 8% lower than a year earlier, and GDP for the whole of
1999 was only 0.2% above its 1998 level.1 Bank Indonesia is forecasting
that in 2000 it will be 3–4% higher than in 1999, and the government is
hoping to achieve a medium-term annual GDP growth rate of 5–6%.
Table 1 shows that household and government consumption never
fell as sharply as exports and investment; they have now been growing
since Q2 of 1998. In contrast, exports, fixed investment and the level of
stocks continued to fall until the middle of 1999, but began to grow in
Q3.2 In this quarter, total exports and fixed investment were only 59%
and 70%, respectively, of their level in Q1 of 1998. An important element
in the plunge in exports was the difficulty experienced by Indonesian
companies in getting trade credit. The collapse of investment was part
cause and part consequence of the fact that Indonesian banks have not
made major new loans since the middle of 1998, and Indonesian
companies have not been able to get new offshore loans since the start of
the crisis.3 The main factor in the recovery of GDP has been the switching
of domestic spending from imported to domestic goods. The fact that
imports in Q3 of 1999 were only 46% of their level in Q1 of 1998 means
that consumption and investment spending on domestic goods fell much
less than total consumption and investment (table 1).
The consumer price index, which had risen by 78% between December
1997 and December 1998, rose by only 2% between December 1998 and
December 1999. This overall CPI change was the combination of falling
prices of tradable goods, due to the strengthening rupiah, and rising prices
of non-tradables. Inflation is expected to rise this year: Bank Indonesia is
forecasting that the increase in the CPI between December 1999 and
December 2000 will be 3–5% if the effects of increased VAT, fuel price
rises and the tariff on rice are excluded. These effects are expected to add
2–3 percentage points during the year, thus bringing the total increase to
5–8%.
The sharp fall in inflation in 1999 and the expected increase in 2000
are of course closely linked to the movement of the exchange rate. In
1999, the price of foreign exchange fell by 12%, from about Rp 8,025/$ in
December 1998 to about Rp 7,100/$ in December 1999. With the exception
of a brief period in mid 1999 when the rate fell below Rp 7,000/$, this
Survey of Recent Developments 15

TABLE 1 National Accounts, 1998–99

(1993 Rp trillion)

1998 1998 1998 1998 1999 1999 1999

Q1 Q2 Q3 Q4 Q1 Q2 Q3

Consumption
Household 69.2 68.5 63.8 66.4 67.1 67.3 67.9
Government 7.1 6.6 6.2 6.9 6.8 7.3 7.2

Gross fixed capital

formation 25.4 22.0 22.9 19.7 18.0 17.3 17.7

Change in stock –1.0 –5.9 –2.5 –1.7 –2.4 –2.2 3.7

Exports of goods
& services 39.3 35.3 38.9 21.2 22.0 21.6 23.4

Imports of goods
& services 39.0 36.1 35.2 22.1 18.5 8.0 17.8

GDP 101.1 90.4 94.1 90.4 93.0 93.2 94.6

% GDP growth
(from 1 year before) –8.0 3.1 0.5

Source: Bank Indonesia (BI).

was the strongest rupiah exchange rate since early 1998. During January
2000, however, the rupiah weakened to around Rp 7,500/$, and the
budget assumption that the average exchange rate for the year would be
Rp 7,000/$ began to look optimistic. This weakening was probably due
mainly to the widespread violence and civil unrest, and the rumours of a
military coup.
Table 2 and figures 1 and 2 document Indonesia’s progress relative to
the four other countries most seriously affected by the Asian crisis.
Indonesia had by far the largest GDP fall in 1998, and it has recovered
16 George Fane

FIGURE 1 Exchange Rates of Asian Crisis Countries, 1997–99

(units of local currency per $; Jan-97 = 100)

700

600

500 Indonesia

400

300 Thailand
Malaysia
200

100
Philippines Korea
0
Jun-97

Jun-98

Jun-99
Sep-97

Sep-98

Sep-99
Mar-97

Mar-98

Mar-99
Dec-97

Dec-98

Dec-99
Source: CEIC Data Hong Kong.

TABLE 2 GDP Growth in Asian Crisis Countries, 1996–99

(% change from one year before)

Indonesia Korea Malaysia Philippines Thailand

1996 7.8 6.8 10.0 7.2 5.9

1997 4.7 5.0 7.5 5.2 –1.8
1998 –13.2 –5.8 –7.5 0.1 –10.4
1999 0.2 7.8 5.1 0.7 3.9
1999 Q1 –8.0 4.5 –1.3 2.1 0.9
1999 Q2 3.1 9.9 4.1 3.8 3.3
1999 Q3 0.5 12.3 8.1 3.3 7.7
1999 Q4 6.2 4.8 9.3 –5.6 3.8

Source: As for figure 1.

Survey of Recent Developments 17

FIGURE 2 3-Month Interest Rates, Asian Crisis Countries, 1997–99

(% per annum)

60

Indonesia
45

Korea
Thailand
30

Philippines
15

Malaysia
0
Jun-97

Jun-98

Jun-99
Sep-97

Sep-98

Sep-99
Mar-97

Mar-98

Mar-99
Dec-97

Dec-98

Dec-99
Malaysia: Interbank rate, weighted average, 3 months.
Indonesia: Bank Indonesia Certificates (SBI) rate, 90 days (auction result).
Korea: Yield on certificates of deposit, monthly average, 91 days.
Philippines: Interbank rate, Central Bank of the Philippines, 3 months.
Thailand: Weighted average interbank interest rate (Bangkok Bank, Siam Bank,
Standard Chartered Bank), 3 months.

Source: As for figure 1.

the most slowly in 1999. Figure 1 shows that the rupiah has appreciated
relative to the other four currencies since mid 1998; it initially depreciated
by much more, but the recent appreciation has not been nearly large
enough to offset the original depreciation relative to the others. Figure 2
tells a similar story for interest rates: 3-month interest rates rose by much
more in Indonesia than in any of the other countries. Since late 1998,
interest rates have come down by more in Indonesia than elsewhere, but
are still higher than in any of the other crisis countries.
18 George Fane

Table 3 shows that whereas in 1996 there was an official capital outflow
of $0.5 billion, the total official net inflow in the three years 1997–99 was
$19.4 billion. Capital flows were first substantially affected by the crisis
in the last quarter of 1997, when there was an official net inflow of $3.2
billion and a private net outflow of $8.6 billion. If ‘the crisis’ is defined as
the period from Q4 of 1997 to Q4 of 1999 inclusive, then adding the flows
in Q4 of 1997 to those shown in table 3 for 1998 and 1999 implies that the
total official net inflow during the crisis was $20 billion and the total net
private outflow was $32 billion. While the official inflows during the
course of the crisis have amounted to only 45% of the $43 billion label
used to describe the original November 1997 IMF package, they have
been large enough to offset over 60% of the private net outflows in this
period. The budget papers predict that the total capital account will be
almost in balance in 2000.

DEMOCRACY, ECONOMIC POLICY MAKING

AND THE RULE OF LAW
Indonesia’s current political situation and its social and legal problems
are vitally important in their own right, but are also crucial to economic
recovery because of their impact on investor confidence. For all the killings
and destruction that accompanied its withdrawal from East Timor,
Indonesia has at least shed the moral and financial burden of its former
province and is stronger for having done so. It is also immensely
strengthened by having a democratic government whose legitimacy is
generally accepted. However, before the economy can recover fully,
Indonesia must also restore civil and political tranquillity and strengthen
the rule of law. Most of all, this means ending the ethnic and religious
violence that continues to smoulder in several regions and that flared up
during the last few months in Maluku, Lombok and Aceh. It also means
resolving the secessionist demands in Aceh (those in Irian Jaya are much
less serious), consolidating Indonesia’s remarkable progress from military
dictatorship to democracy, and greatly strengthening the legal system.

Economic Policy Making

An unintended side effect of the new independence of Bank Indonesia
has been to fragment the group of ministers responsible for economic
policy (McLeod 1999: 148). As a result of BI’s independence, its Gover-
nor, Sjahril Sabirin, is no longer in the cabinet, and in consequence of the
failings exposed by a very critical audit of BI, he has lost the confidence
Survey of Recent Developments 19

TABLE 3 Balance of Payments, 1996–2000

($ billion)

1996 1997 1998 1999 2000

(prelim.) (prelim.)

1 Exports of goods 50.2 56.3 50.4 51.6 55.1

Non-oil & gas 38.0 44.6 43.0 41.4 44.2
Oil & gas 12.2 11.7 7.4 10.2 10.9
2 Imports of goods 44.2 46.2 31.9 31.3 35.7
Non-oil & gas 39.9 41.4 29.1 27.4 31.4
Oil & gas 4.4 4.8 2.9 3.9 4.3
3 Trade balance (1 – 2) 5.9 10.1 18.4 20.3 19.4
Non-oil & gas –1.8 3.1 13.9 14.0 12.8
Oil & gas 7.8 6.9 4.6 6.3 6.6
4 Services –13.7 –15.1 –14.3 –15.1 –15.8
Non-oil & gas –10.2 –10.5 –11.4 –12.0 –12.5
Oil & gas –3.5 –4.6 –2.9 –3.1 –3.2
5 Current account (3 + 4) –7.8 –5.0 4.1 5.2 3.7
Non-oil & gas –12.1 –7.4 –2.4 –2.0 0.3
Oil & gas 4.3 2.4 1.7 3.2 3.4
6 Official capital inflow –0.5 2.9 10.0 6.5 5.8
7 Private capital inflow 11.5 –0.3 –13.8 –9.8 –6.4
8 Capital inflow (6 + 7) 11.0 2.5 –3.9 –3.2 –0.6
9 Errors & omissions 1.3 –1.7 2.1 1.4 0.0
10 Balance of payments
surplus (5 + 8 + 9) 4.5 –4.1 –2.3 –3.4 3.0

Source: BI.

of the President. The audit, prepared by KPMG and the local firm
Siddharta and Harsono (JP, 3/1/2000), found that BI had violated its
own lending procedures in the disbursement of the last-resort loans it
extended to the banks in 1997–99. A separate criticism made by the audi-
tors is that BI did not have proper internal controls. For example, it had
no proper inventory of its fixed assets and had lost its certificates of own-
ership of the gold that it has deposited in various overseas custodial banks.
President Abdurrahman Wahid (Gus Dur) called for the parliament (DPR)
to dismiss Sjahril. However, the Governor indicated his determination
20 George Fane

to continue in his position, and under the new Bank Indonesia Act he
can only be forced out of office on medical grounds or for the commis-
sion of a crime.
The fragmented state of economic policy making was deplored in an
article by the Senior Deputy Governor of BI, Professor Anwar Nasution,
who has been tipped as a likely successor to Sjahril (The Business Times,
26/1/2000). One of the problems of the economics ministers is that, in
common with the rest of the National Unity Cabinet (Mackie 1999), they
represent a wide spectrum of political parties. The Finance Minister,
Bambang Sudibyo, is a member of Amien Rais’s National Mandate Party
(PAN), the Coordinating Minister, Kwik Kian Gie, and the State Minister
of Investment and State Enterprises, Laksamana Sukardi, belong to
Megawati’s PDI-P, while Yusuf Kalla, the Minister of Trade and Industry,
is a Golkar member.
In order to avoid being dominated by the economics ministries, the
President has set up his own board of economic advisers, the DEN (Dewan
Ekonomi Nasional), which comprises a number of prominent economists
and businessmen and is headed by Emil Salim, one of the most eminent
of the group of technocrats that pressed for deregulation during the
Soeharto years. Perhaps in part because of a lack of interest in economic
problems, Gus Dur has not used the DEN to flesh out his own preferred
economic policies, but has rather suggested that its members take their
ideas to the various economics ministers. The latter are reported to be
understandably unenthusiastic about taking advice from the new
interlopers. The President’s willingness to tolerate divisions among his
economics ministers and advisers and to delegate concern with economic
policy to others may well reflect the fact that these matters are mostly of
secondary importance now that the outlines and much of the detail of
economic policy for the next four years have been laid down in the
agreement with the IMF.

The New IMF Program

Because it was not satisfied that former President Habibie’s government
had responded satisfactorily to the PricewaterhouseCoopers (PwC)
investigation into the Bank Bali scandal, and because of the bloodshed
that followed East Timor’s vote for secession, the IMF suspended its
lending program in September 1999.4
The new government worked quickly to mend its bridges with
Washington, and began to negotiate an extension of the IMF program. In
January 2000, US Treasury Secretary Lawrence Summers visited Jakarta
and held out the promise of US support for new loans of $10 billion from
Survey of Recent Developments 21

the international community, on condition that Indonesia pressed ahead

with economic reforms. At the same time Richard Holbrooke, US
Ambassador to the UN, explicitly warned Indonesia’s generals that the
loans were also conditional on their not staging a coup. The government
signed a new letter of intent (LOI) to the IMF on 20 January, in which it
noted that a strong set of measures was being taken to ‘credibly advance’
its investigation of the Bank Bali affair. These were: to release the full
version of the PwC report; to name six suspects, among whom were a
senior official of Bank Indonesia, the former deputy chairman of IBRA
(the Indonesian Bank Restructuring Agency), the former head of Bank
Bali and Mr Tanri Abeng, a former minister; and to instruct the Attorney
General to investigate the case further.
The new LOI is longer and more detailed than its predecessors, and
much of the new detail involves defining procedures to audit state
agencies and set up committees to investigate cases of suspected
corruption and prosecute those responsible. There seems little reason to
doubt that the increased emphasis on fighting corruption comes at least
as much from the new government as from the IMF.
The budget begins the process of applying the economic policies in
the LOI, which preserve the principles of earlier LOIs. BI is committed to
keeping annual inflation to 5% and will do this by targeting base money;
the poverty alleviation programs are being overhauled and expanded in
aggregate; bank restructuring should be completed this year; the
government plans to reduce its debts by privatising state-owned
enterprises and selling off assets acquired as a result of the bank bailout;
attempts are to be made to force judges to apply the bankruptcy law
correctly; and teeth are being put into the Jakarta Initiative, which was
originally created in 1998 as a purely voluntary mediation system for
restructuring corporate debt.
In early February 2000, the loans promised by the US Treasury
Secretary were officially approved. The Consultative Group on Indonesia
(CGI)—the group of official lenders dominated by the World Bank, the
Asian Development Bank (ADB) and Japan—met in Jakarta on 1 and 2
February and agreed to lend Indonesia $4.7 billion.5 Then on 4 February,
the IMF formally agreed to add $5 billion to the $11 billion that it had
previously agreed to lend, and immediately disbursed $349 million.
President Abdurrahman has been criticised for spending too much
time out of the country and for neglecting economic issues. However,
Indonesia has little alternative but to follow the very detailed economic
policies laid down in the LOI to the IMF. What is important is to press
ahead as quickly as possible with the implementation of this program,
and on this the President has acted decisively: because IBRA had been
 22
TABLE 4 Draft Budget Revenues
for 1999/2000 and 2000

1999/2000 2000 1999/2000 2000 Increase as % Growth

(12 months) (9 months) % of GDP of Share
(Rp trillion) (Rp trillion) (% of GDP) (% of GDP) in GDP
(1) (2) (3) (4) (5) (6)

(4) – (3) (5) as % of (3)

Total revenue 129.2 37.7 10.6 15.1 4.6 43.3

Tax revenue 99.5 97.8 8.1 10.7 2.6 32.2
Domestic taxes 93.9 91.9 7.7 10.1 2.4 31.5
Income tax 45.4 53.0 3.7 5.8 2.1 57.1
Non-oil & gas 40.6 44.2 3.3 4.9 1.5 46.3
Oil & gas 4.7 8.8 0.4 1.0 0.6 150.4
Value added tax 34.6 26.3 2.8 2.9 0.1 2.1
Land & building tax 3.2 2.9 0.3 0.3 0.1 20.1
Excises 10.2 9.3 0.8 1.0 0.2 22.7
Other taxes 0.6 0.4 0.0 0.0 0.0 3.0
Taxes on international trade 5.5 5.9 0.5 0.6 0.2 43.0
Import duties 3.0 5.0 0.2 0.5 0.3 126.8
Export tax 2.6 0.9 0.2 0.1 –0.1 –52.2
Non-tax revenue 29.7 39.9 2.4 4.4 2.0 80.6
Natural resources 8.1 30.3 1.5 3.3 1.9 125.0
Oil & gas 16.2 28.6 1.3 3.1 1.8 137.3
Other natural resources 1.9 1.7 0.2 0.2 0.0 19.9
Profit transfers from SOEs 4.0 4.0 0.3 0.4 0.1 34.5
Other non-tax receipts 7.6 5.6 0.6 0.6 0.0 –1.0

Memo item: GDP (Rp trillion) 1,224.2 910.4 1,224.2 910.4 –25.6
George Fane
Survey of Recent Developments 23

making only very slow progress with bank restructuring and asset sales,
he replaced its head and some of its most senior staff members.

Confined to Barracks for Now

Indonesia’s National Commission on Human Rights, which had been
requested by the government to investigate alleged atrocities in East
Timor, presented a report to the Attorney General on 31 January,
documenting some of the ‘planned and systematic violence’ that had
followed the ballot. The report recommended that ‘General Wiranto, as
TNI [Indonesian military] chief, should be held accountable’ and that
the Attorney General investigate Wiranto and 31 others, among whom
are five other generals. In mid February, Wiranto was suspended from
cabinet, and his position as Coordinating Minister for Political Affairs
and Security was assumed on an acting basis by Lt General (ret.) Surjadi
Soedirdja, the Minister of Home Affairs. Despite the earlier rumours of a
coup, the military seemingly accepted Wiranto’s dismissal, and the
prospect that he and other officers may be brought to trial for their part
in the events in East Timor.
At least for the time being, the President appears to have established
the dominance of a democratically elected civilian government over the
armed forces. This achievement is fragile, but it is something that seemed
scarcely possible even two years ago. Gus Dur’s astute judgment has
been one important factor in bringing it about; others include the popular
fury that toppled Soeharto, the increased dependence of Indonesia on
the international community, the disgrace that the armed forces brought
on themselves in East Timor and the fact that the National Commission
on Human Rights did not flinch from its duty.

THE BUDGET
Projected Revenues and Expenditures in 2000
The President and Vice President unveiled the new budget on 27 January
(tables 4, 5 and 6). The new financial year, beginning on 1 April, will last
only nine months, so as to align the financial and calendar years with
effect from 2001.
The main items in the new budget are the reform of tax administration
so as to reduce avoidance and raise tax revenue as a share of GDP;
increases in public sector wages as part of the fight against corruption;
reduction of general subsidies to domestic fuel users; and increases in
the total revenue allocated to poverty alleviation programs, accompanied
 24
TABLE 5 Draft Budget Expenditures
for 1999/2000 and 2000

1999/20 2000 1999/2000 2000 Increase as % Growth

(12 months) (9 months) % of GDP of Share
(Rp trillion) (Rp trillion) (% of GDP) (% of GDP) in GDP
(1) 2) (3) (4) (5) (6)
(4) – (3) (5) as % of (3)

Expenditure, including interest 212.7 183.1 17.4 20.1 2.7 15.7

Expenditure, excluding interest 158.2 124.1 12.9 13.6 0.7 5.5
Current non-interest expenditures 96.4 84.7 7.9 9.3 1.4 18.1
Personnel 33.6 29.4 2.7 3.2 0.5 17.6
Material 11.0 8.9 0.9 1.0 0.1 8.9
Regional 19.5 17.1 1.6 1.9 0.3 18.0
Subsidies 28.0 26.7 2.3 2.9 0.6 28.0
Fuel subsidies 10.0 18.3 0.8 2.0 1.2 146.4
Non-fuel subsidies 18.0 8.4 1.5 0.9 –0.6 –37.6
Other routine expenditures 4.3 2.6 0.4 0.3 –0.1 –17.9
Development expenditures & net lending 61.7 39.4 5.0 4.3 –0.7 –14.2
Rupiah financing 31.7 23.4 2.6 2.6 0.0 –1.1
Transfers to regions 16.1 15.1 1.3 1.7 0.3 26.2
Managed by central government 15.6 8.2 1.3 0.9 –0.4 –29.3
Project financing 30.0 16.0 2.5 1.8 –0.7 –28.2
Interest payments 54.5 59.0 4.5 6.5 2.0 45.5
Interest on domestic debt 34.0 42.4 2.8 4.7 1.9 67.5
Interest on foreign debt 20.5 16.6 1.7 1.8 0.1 8.9

Memo item: GDP (Rp trillion) 1,224.2 910.4 1,224.2 910.4 –25.6
George Fane
Survey of Recent Developments 25

TABLE 6 Draft Budget Financing

for 1999/2000 and 2000

1999/2000 2000 1999/ 2000 Increase

(12 months) (9 months) 2000 as %
(Rp trillion) (Rp trillion) (% of GDP) (% of GDP) of GDP
(1) (2) (3) (4) (5)
(4) – (3)

Primary surplus
(before interest) –29.0 13.6 –2.4 1.5 3.9
Interest payments 54.5 59.0 4.5 6.5 2.0
Overall surplus –83.5 –45.4 –6.8 –5.0 1.8
Financing 83.5 45.4 6.8 5.0 –1.8
Domestic financing 30.0 22.2 2.5 2.4 0.0
Privatisation proceeds 13.0 5.9 1.1 0.7 –0.4
Asset recovery 17.0 16.3 1.4 1.8 0.4
Foreign financing 53.5 23.2 4.4 2.5 –1.8
Gross drawing 77.4 31.8 6.3 3.5 –2.8
Program loans 47.4 15.8 3.9 1.7 –2.1
Project loans 30.0 16.0 2.5 1.8 –0.7
Amortisation –23.9 –8.6 –2.0 –0.9 1.0

Memo item:
GDP (Rp trillion) 1,224.2 910.4 1,224.2 910.4

by the phasing out of some emergency programs created to deal with the
crisis-related increase in poverty. The regions are gradually getting more
fiscal autonomy, but the main changes (Booth 1999: 27–32) will not occur
until 2001.
As a result of the growth of debt, the interest cost of the government
bonds already issued to banks is expected to be Rp 42.4 trillion in the
nine months of FY 2000, which is much higher than the Rp 34 trillion in
the full 12 months of the 1999/2000 budget. The government expects to
raise total tax revenue from 8.1% of GDP in FY 1999/2000 to 10.7% in FY
2000. Most of the increase is assumed to come from the rise in income tax
revenue from 3.7 to 5.8% of GDP. The higher world price of oil should
raise non-tax revenue from 2.4 to 4.4% of GDP. These revenue increases
26 George Fane

are assumed to offset the rise in non-interest expenditures by enough to

convert the primary deficit (i.e. the deficit before allowing for interest
payments) of 2.4% of GDP in FY 1999/2000 into a primary surplus of
1.5% of GDP in FY 2000.
However, interest payments on government debt are projected to rise
from 4.5% of GDP in FY 1999/2000 to 6.5% in FY 2000. As a result, the
overall deficit in FY 2000, as officially measured, is projected to be 5% of
GDP. This happens to be less than the measured deficit in FY 1999/2000
of 6.8% of GDP, but the comparison is meaningless: budget deficits are
supposed to measure how much the government is borrowing from other
sectors, but in the aftermath of Indonesia’s economic crisis its budget
deficits do not have this (or any other simple) meaning. The reason is
that the cost of the bank bailout has not been acknowledged as an on-
budget expense.6 Since the deficit in FY 1999/2000 should have included
a large part of the cost of bailing out the banks, it was really many times
the size of the true deficit in FY 2000.
The officially measured deficit for FY 1999/2000 reported in table 6 is
smaller than predicted, because oil prices and revenues are higher than
expected, and because development spending fell behind schedule. The
latter was due partly to recent political uncertainties and civil unrest,
and partly to donors delaying disbursement of funds in response to the
Bank Bali affair.
Roughly half of the measured deficit in FY 2000 is to be financed by
official foreign borrowing. The budget assumed that Indonesia would
obtain $4.1 billion in new loans from major donors at the CGI meeting, a
target easily surpassed by the $4.7 billion actually pledged. Most of the
remaining half of the measured deficit is to be financed by IBRA’s asset
sales and portfolio income (1.8% of GDP), the rest by privatisation of
state-owned enterprises (0.7% of GDP).
If repayments of arrears owed by the central government to Pertamina
were excluded, expenditure would fall from 13.6% of GDP to just over
10%. For simplicity, revenues and expenditures are conventionally
recorded when they are realised; conceptually, however, there is a good
case for recording them on an accruals basis: the arrears have arisen in
earlier years because Pertamina did not receive the full amounts that it
was entitled to under the fuel subsidy arrangements, which require it to
buy crude oil at the world market price and sell refined products at lower
domestic prices. Payments this year to Pertamina to finance last year’s
fuel subsidy are really an outlay for last year, not this year. If this
convention were adopted, the deficit would be reduced to 3.5% of GDP.
A good case can also be made that IBRA’s portfolio income should be
classified with other profits of state-owned enterprises, and that its asset
Survey of Recent Developments 27

disposals and privatisation sales should be classified as dis-investment

in assets directly controlled by the government. If all three of the above
corrections were made, the measured deficit of 5% of GDP in FY 2000
would become a surplus of 1.5%. In contrast, if measured expenditures
in FY 1999/2000 were adjusted for the omission of the cost of the bank
bailout and for the delays in reimbursing Pertamina for fuel subsidies,
the true deficit would be far in excess of the 6.8% officially recorded.

TRADE LIBERALISATION
Although the trade regime is now much more open than it was in 1995,
when it was already far more open than it had been in the mid 1980s,
Indonesia has fallen behind the targets set in the May 1995 trade
liberalisation package (Nasution 1995: 13–18). A new package of trade
reforms announced on 31 December reduced the rates on 232 tariff lines,
but this still left 2,142 lines above the 1995 target.
Apart from those on automobiles and alcohol, the highest tariff rate
is now 25%, and this rate applies to only 45 tariff lines, mainly in the steel
and chemical sectors. The four-year program agreed to with the IMF
contains a commitment by the government to have a three-tier tariff
structure in place by the end of 2003, with rates of 0, 5 and 10% for all
items except automobiles and alcohol. Most non-tariff barriers have
already been removed and all the remaining ones, except those required
for health and safety reasons, are scheduled to go by the end of 2003. The
taxes on exports of sawn timber are to be replaced by higher royalties
and resource rent taxes. Indonesia is obliged by the barriers imposed on
it by the industrialised countries to set quotas on exports of garments.
All its other export licensing requirements—the main ones are now coffee,
logs and wood products—are to be removed by the end of 2000.
The LOI makes a commitment to remove all import duty exemptions.
This proposal is quite controversial, since such exemptions currently
apply to about half of imports and are used mainly for producing exports
and by investors. The LOI sides with those who argue that exemptions
should be avoided and tax bases made as broad as possible, so as to
allow rates to be set low. The opposite school of thought is that it is
important for non-oil exporters to have access to inputs at world prices,
and that the inevitable delays in obtaining duty drawbacks therefore make
exemptions highly desirable.
Trade in rice is now open to all general importers and exporters, but
the government has introduced a tariff of Rp 430/kg on rice to cushion
farmers from the effects of falling world market prices and the
28 George Fane

strengthening of the rupiah. This tariff is supposed to be temporary and

will end in August 2000, unless it is explicitly renewed at that time. Exports
of crude palm oil are still taxed, but the tax rate was reduced from 30% of
the government’s reference price to 10% in July 1999. The effective rate is
lower because world prices are now below the reference price.

PRIVATISATION
The government continues to make only very slow progress in privatising
state-owned enterprises (SOEs). In FY 1999/2000, the initial budget
projection was for privatisation revenue of Rp 13.0 trillion. This was
reduced in the LOI to Rp 8.6 trillion and, with the financial year almost
over, the total amount realised was only Rp 6.2 trillion. This was made
up by sales of blocks of shares in only four enterprises: Telkom (Rp 2.8
trillion), two container terminals (Rp 2.8 trillion) and Indofood (Rp 0.5
trillion). Planned sales to strategic investors of shares in plantation
companies and the Soekarno–Hatta airport authority fell through because,
in each case, the prospective investor and the government could not agree
on the price.
The economic case for privatisation is that managers answerable to
private shareholders have a more direct incentive to eliminate cross-
subsidies and maximise profits than do managers answerable to a
minister. However, privatisation presents a dilemma to governments:
selling assets yields an immediate cash flow far in excess of their earnings
in a single year, but is politically unpopular, in part because many people
feel that enterprises that are national icons should not be sold to private
entrepreneurs, and in part because full privatisation puts an end to hidden
cross-subsidies to employees, favoured customers and suppliers.
In the past, the government has resolved the privatisation dilemma
by selling blocks of shares in SOEs, while still retaining control. For
example, it never gave up control of the cement company, PT Semen
Gresik, despite making an initial public offering (IPO) of some of its shares
in 1991 and then selling a further 14% of its shares to Cemex of Mexico in
1998. Similarly, it has retained about two-thirds of the shares in Telkom
and Indosat, following IPOs in 1995 and the subsequent sale of a further
9.8% of its shares in Telkom in 1999. Although the need to finance the
bailout of the financial sector has made the government more desperate
for revenue than ever before, it has deviated from this strategy of selling
shares while retaining a controlling interest in only one case: its sale in
1999 of 51% of the shares in the Jakarta International Container Terminal
at Tanjung Priok to Grospeak (a subsidiary of Hutchinson Whampoa of
Survey of Recent Developments 29

Hong Kong) for $243 million. The government did sell the whole of its
former shareholding in Indofood, but this was only ever a minority
shareholding. The sale of the Surabaya container terminal to Mermaid (a
subsidiary of P&O Australia) raised $174 million. In this case, the
government retained 51% of the shares.
Revenue from privatisation in FY 2000 is projected to be at least
Rp 5.9 trillion, which is about 13% of the measured budget deficit. The
State Minister for Investment and State Enterprises has suggested that
the actual amount raised may be as high as Rp 8 trillion. These amounts
refer to sales of shares in traditionally state-owned firms. Thus the FY
2000 projection excludes the IPO in Bank Central Asia, which is counted
as part of IBRA’s contribution to the financing of the budget deficit.7
The government has not yet announced exactly what it will sell in FY
2000. Although the LOI mentions Telkom and Indosat as strong possible
candidates for further privatisation, the government plans to deregulate
the telecommunications sector before fully privatising it, and deregulation
is not expected to be completed before 2004. However, this does not
preclude the possibility of further sales of blocks of shares in 2000:
following IPOs in 1995, and the 1999 sale of a further 9.8% of its remaining
Telkom shares, the government still owns roughly two-thirds of both
companies.8 Other privatisation possibilities in 2000 are: Soekarno–Hatta
International Airport in Jakarta; Garuda Indonesia; palm oil plantations
in North Sumatra; a fertiliser company in East Kalimantan; a coal mining
company in South Sumatra (PT Bukit Asam); and two pharmaceutical
companies.

THE TEXMACO AFFAIR

In late November, the State Minister for Investment and State Enterprises,
Laksamana Sukardi, revealed that President Soeharto had been directly
involved in helping the textile and engineering conglomerate Texmaco,
run by Mr Marimutu Sinivasan, to secure loans from Bank Indonesia
that were channelled through Bank Negara Indonesia (BNI) and other
state banks answerable to Sukardi’s ministry. The total loan package,
which was negotiated between November 1997 and February 1998, was
for about $1 billion, in the form of $754 million in foreign exchange and
Rp 1.9 trillion (anything from $180 million at the February 1998 exchange
rate to $500 million at the November 1997 rate) in domestic currency.
Had the loan been a normal commercial one, it would have breached
the prudential regulation that bars a bank from making a loan to any
single borrower for more than 20% of its capital. Instead, it was made
30 George Fane

under a special BI facility for export finance, to which this prudential

limit does not apply. In the event, Texmaco apparently used the loan to
repay short-term foreign currency debts. From Texmaco’s viewpoint, the
loan from the export finance facility also had the advantage of being at a
heavily subsidised interest rate.
At least initially, the reaction of the DPR seems to have been that the
Texmaco group is so important a generator of jobs and exports that the
affair must not be allowed to disrupt its operations. The Chairman of the
Indonesian Textile Association said that ‘if you want to kill a rat, don’t
burn down the house to do it’ (Business Indonesia Perspective, 1/1/2000:
21). One might add ‘so find a better way’. The Attorney General is still
investigating possible illegalities.

POVERTY
Estimates of the Proportion of the Population in Poverty
The debate over the extent to which poverty increased as a result of the
crisis was comprehensively surveyed by Booth (1999). As Booth’s table 6
showed, the special ‘mini’ (‘Susenas-type’) survey of household
expenditure carried out by the Central Statistics Agency (BPS) in
December 1998 indicated that the poverty rate rose from 11.3% in February
1996 to 16.7% in December 1998.9 These estimates refer to the ‘headcount’
rate of poverty, defined as the percentage of the population with
consumption expenditures below the official BPS poverty line.
In February 1999, a full household expenditure survey was
undertaken and the results have now been released. Suryahadi, Sumarno,
Suharso and Pritchett (1999)—henceforth SSSP—analyse these data and
adjust existing studies so as to put them all on a comparable basis and
estimate how poverty changed during the crisis. The main features of
their results are summarised in table 7. Starting from the rate of 11.3%,
which was officially estimated by BPS from a full household expenditure
survey in February 1996, poverty fell to 7.2% in August–October 1997,
just before it began to be affected by the crisis (SSSP 1999: table 6, last
column).10 It then rose sharply to just over 20% in August 1998 and was
still just over 20% in February 1999. The exact rate implied by the February
1999 survey is 20.3%. If this new estimate is correct, it implies that the
poverty rate in February 1999 was similar to the rate observed in the mid
1980s, whereas the December 1998 mini household expenditure survey
had implied a regression only to late 1980s rates.
Another mini household expenditure survey was undertaken in
August 1999. The results have not yet been officially released, but they
Survey of Recent Developments 31

TABLE 7 Estimates of Poverty Rate on a Consistent BPS Basis, 1996–99

Survey Date Poverty Survey

Rate
%

Feb-96 11.3 BPS/Susenas

Aug-97 7.2 National Accountsa
Aug-98 20.7 ‘100 villages’ adjustedb
Sep–Dec 98 20.1 IFLS/Rand adjustedc
Dec-98 15.3 ‘100 villages’ adjustedd
Dec-98 16.7 BPS/mini Susenas
Feb-99 20.3 BPS/Susenas

a
There was no survey in August 1997. The estimate was derived by Suryahadi et
al. (1999), who adjusted the BPS estimate for February 1996 using national accounts
data on the changes in consumption between February 1996 and August 1997.
b
Adjustment by SSSP of estimate by the Social Monitoring and Early Response
Unit (SMERU); reported rate was 21.41%.
c
Adjustment by SSSP of estimate from a special round of the Indonesian Family
Life Survey (IFLS) conducted by the Rand Corporation; reported rate was 19.9%.
d
Adjustment by SSSP of estimate by SMERU; reported rate was 16.79%.

Source: Suryahadi et al. (1999) (SSSP), in which see further details of the surveys
cited above, and the methods by which the non-BPS surveys were adjusted to a
consistent BPS basis.

apparently indicate a much lower poverty rate even than the 16.7%
estimated for December 1998. At least some of the surveys must contain
measurement errors, because they tell an implausible story in which the
poverty rate took a one-year roller coaster ride from somewhere between
20 and 21% in mid 1998 down to 16.7% in December, climbed to 20.3% in
February 1999, and then by August 1999 had apparently swooped back
down to below the rate in December 1998.11
One possible interpretation of these estimates is the following. Because
the price of rice (which has a much higher weight in the basket that defines
32 George Fane

the poverty line than in the CPI) has been falling both in absolute terms
and relative to the CPI, poverty really did fall between mid 1998 and mid
1999. But the roller coaster ride surely exaggerates the real changes.
Although the full household expenditure survey (February 1999) and
the mini surveys (December 1998 and August 1999) used identical
questionnaires, they were undertaken by different groups within BPS,
which may have treated in different ways some of the inevitably arbitrary
decisions that must be made in such surveys.

Spending on Programs to Combat Poverty

The new budget and LOI distinguish three broad groups of policies for
helping poor people: the social safety net (SSN), poverty alleviation and
targeted fuel subsidies.12 The ‘targeted fuel subsidies’ in the welfare
program are expected to cost Rp 1.3 trillion in FY 2000, and represent
compensation to poor families for higher domestic fuel prices. The main
element is the increased price of kerosene. No decision has yet been made
on how to distribute these subsidies.
The difference between the safety net and poverty alleviation
programs is partly real and partly a matter of labelling. The SSN programs
were created hurriedly in response to the crisis and are now mostly being
wound back, whereas the ‘poverty alleviation’ programs are being
expanded. For FY 1999/2000, one can say which programs were in the
SSN category (budgeted to cost Rp 5.6 trillion in that year) and which
were in the poverty alleviation category. Table 8 shows the distribution
of the budgetary estimates between the two categories in FY 2000 as it
appears in the LOI. However, this division has little meaning, because
decisions on which programs to expand and which to eliminate have not
yet been finalised. The poverty alleviation program, for which Rp 1.7
trillion was budgeted in FY 1999/2000, is the much amended descendant
of the program for backward villages (IDT: Inpres Desa Tertinggal), first
introduced in 1994. In FY 2000, this program will be retained and an
analogous program for urban areas will be added. But the fate of the
individual elements that were in the SSN in FY 1999/2000 has not yet
been decided. Some, such as the programs for spending on scholarships
and schools, may well be retained, but the majority will be phased out.
The programs that are judged to have been most successful and are
retained on a long-term basis will be reclassified from ‘SSN’ to ‘poverty
alleviation’.
Table 8 shows that although the social safety net is being phased out,
total spending on all the poverty programs is to be expanded substan-
Survey of Recent Developments 33

TABLE 8 Expenditure on Social Safety Net and Poverty Alleviation, 1999–2000

FY 1999/ FY 2000 FY 2000 Growth in

2000 x 12/9 Nominal
(12 months) (9 months) (12 months) Expenditure
(Rp trillion) (Rp trillion) (Rp trillion) (%)

SSN + poverty alleviation 7.3 7.2 9.6 32

Social safety net 5.6 2.7 3.6 –36
Poverty alleviation 1.7 4.5 6.0 253
Targeted fuel subsidies 0.0 1.3 1.7 n.a.
Total 7.3 8.5 11.3 55

Sources: LOI, 20 January 2000; World Bank.

tially: when the FY 2000 budget projections are scaled up to a 12 months

basis, the increase will be 55% if the targeted fuel subsidies are included,
and 32% if they are excluded.
There are two other kinds of welfare programs in addition to the
‘mainstream’ ones included in table 8. First, there are programs run by
NGOs and funded directly by donations from foreign governments. These
are small compared with the mainstream programs, but are believed to
be growing rapidly. The new LOI expresses the government’s approval
of this trend. Second, there are numerous initiatives by provincial
governments to alleviate poverty using the growing share of GDP that
the central government is allocating directly to them.

The Social Safety Net and Poverty Alleviation Programs

There are currently four elements in the social safety net: a subsidised
food program; a program to provide block grants to schools in poor
communities and scholarships to help children from poor families to stay
in school; a program to subsidise health clinics and medicines in poor
areas; and various job creation schemes.
Appraisals of the social safety net programs by SMERU suggest that
education subsidies have been the most effectively targeted.13 The funds
34 George Fane

for scholarships have been handed out to village community groups who
then have the responsibility of selecting the most needy and deserving
children.
The rice subsidy program has not escaped allegations of corruption,14
but is judged by SMERU to have worked quite well, given that the
administrative resources needed to issue and stamp ration coupons were
not available. Data collected by the National Family Planning Board were
used to identify 17 million poor households, using criteria such as whether
they live in houses with earth floors and whether they are too poor to
own a motorcycle. These data determine the total entitlements of all the
poor people in particular villages or urban areas. It appears that trucks
are then sent to these locations with roughly appropriate amounts of
cheap rice, which people then queue to buy. Self-selection probably
ensures that the poor get most of it.
The subsidised health program faces the inevitable problem that in
rural areas many families are located far from the nearest health clinics
and find it very difficult to make use of even heavily subsidised facilities
and medicines. The least successful schemes have been the job creation
programs. The contractors who successfully tender for the funds to
operate these programs have little incentive to try to allocate the jobs to
the most needy, and the infrastructure projects that have been
commissioned sometimes appear to have little value.
In 1999/2000 there was one main poverty alleviation program: the
kecamatan (subdistrict) development program (KDP). This is descended
from the IDT program to help poor villages, but differs from it in several
ways: funds under the IDT program went directly to villages identified
by the government. Under the KDP, funds go to each kecamatan, and
villages can compete by submitting proposals. The villages whose
proposals are selected then have considerable control over the details of
how their grants are spent. The rules of the competition favour small-
scale labour-intensive projects that will provide facilities for the use of
local communities; examples include repairing roads, renovating or
extending schools, clinics and other public buildings, or improving
facilities in open air markets.
Although the KDP is not exclusively rural, it has a strong rural bias.
Because the recent crisis has affected urban areas much more severely
than rural areas, a new program is being introduced this year that will
resemble the KDP, but will be focused on urban areas.
Survey of Recent Developments 35

BANKRUPTCY
Progress under the new bankruptcy law that came into force with the
opening of the Commercial Court in September 1998 has been
disappointing, but not completely negligible. About 30 cases were filed
in 1998 and exactly 100 in 1999. The creditors have won only about one-
fifth of the cases brought. To have the defendant declared bankrupt, the
plaintiff must prove that the defendant has debts to at least two creditors
and that one of these debts is due and payable. Although this test seems
relatively simple, most of the decisions in favour of debtors have been
made on technicalities. In discussing debt and bankruptcy, the LOI refers
to the judiciary having ‘governance problems’, which is a not very indirect
way of saying that they are corrupt (LOI, para 62).
Speaking at a seminar on economic recovery, Professor Sadli, an
eminent economist and former minister, called on the government to take
the lead in speeding up corporate restructuring, and to make an example
of a few prominent recalcitrant debtors. One obvious way to do this is
for IBRA to file bankruptcy suits in strategic cases. In December 1999,
IBRA filed two suits in the Commercial Court against debtors that it
claimed had failed to cooperate with it in attempts to restructure their
debts (JP, 28/1/00). One case was brought against PT West Kalindo Pulp
Papermill, the other against PT Comexindo.
In the Comexindo case, IBRA is seeking to recover Rp 38 billion that
Comexindo owed to Bank Tamara, which was subsequently taken over
by IBRA. Comexindo also has outstanding debts to other domestic and
international creditors of Rp 1.5 trillion. In late January Comexindo
requested a ‘suspension of payment’, which amounts to surrendering:
by agreeing to such a request, the Commercial Court provides the debtor
with a respite from the creditors’ demands for payments for a minimum
of 45 days; creditors can extend this to a maximum of 270 days to allow
for negotiations on debt restructuring. If no agreement has been reached
after 270 days, the creditors can enforce the immediate bankruptcy of the
defendant. The decision on whether the deal proposed is satisfactory is
therefore taken out of the hands of the judges of the Commercial Court.
Nor does the debtor have a right of appeal to the Supreme Court. Debtors
therefore only request an initial 45-day suspension of payments if they
are confident that they can persuade the creditor to agree to an extension
of up to 270 days, and if they are confident that within this period they
will be able to propose a deal that is more attractive to the creditors than
organising a liquidation of assets at fire sale prices.
36 George Fane

In the Kalindo case, IBRA’s application was dismissed on two

grounds: first, the court held that IBRA had failed to prove that Kalindo
had at least two creditors; second, it ruled that Kalindo’s debt was not
‘due and payable’, because IBRA and Kalindo had entered into a debt-
restructuring deal.
IBRA’s mixed fortunes at least gave it a better success rate than private
creditors.

JUDICIAL CORRUPTION
The LOI reveals three strategies for trying to make the bankruptcy law
work as it is supposed to. The first involves the appointment of ad hoc
judges from the private sector to the Commercial Court. Procedures for
appointing such judges were published in December 1999, and the LOI
announced that IBRA would request that all future cases it files be heard
by ad hoc judges. The first time IBRA did so, the Court rejected its request
without giving reasons that appeared valid. How much difference ad hoc
judges will make, even if they are eventually admitted, seems doubtful,
because decisions by the Commercial Court can be appealed to the
Supreme Court, which also regularly finds technical grounds for deciding
cases in favour of debtors. Even an appeal to the Supreme Court is not
necessarily the final step in bankruptcy cases, because—if there is new
evidence, or if there has been a serious misapplication of the law in both
the lower court and the Supreme Court—the loser can request the
Supreme Court to review its own decisions under a process of Civil
Review.
The second element in the government’s strategy is the creation of an
Independent Commission for the Audit of State Officials (ICASO), which
is to be established and functioning by the end of March. In addition to
investigating the wealth of ministers and senior bureaucrats, it will have
a special subcommission to investigate the wealth of judges and refer
evidence of corruption to the Attorney General for prosecution. The LOI
notes that this will be its first priority. A Joint Investigating Team to be
coordinated by the Attorney General will investigate allegations of
corruption, and its first task will be to investigate corruption within the
court system.
The third part of the government’s new strategy is to have the Attorney
General bring applications for bankruptcy against strategic debtors, rather
than leave the onus for such actions entirely on private creditors. The
Attorney General has always been able to bring bankruptcy applications
to the Commercial Court in the public interest, but none was ever brought.
Survey of Recent Developments 37

What is new is the creation of a framework of regulations to facilitate

this process. This is to be done by putting teeth into the Jakarta Initiative
(JI), which was originally a purely voluntary mediation framework. The
LOI foreshadowed the creation of a new committee, the Financial Sector
Policy Committee (FSPC), comprising several of the most senior
economics ministers, that reports directly to the President and oversees
both IBRA and the JI. One of the functions of the FSPC will be to refer
strategic corporate restructuring cases to the JI. If the JI staff judge that
the debtor is not negotiating in good faith, they can notify the FSPC,
which in turn can recommend that the Attorney General should file an
application for the debtor to be declared bankrupt. Actions in the public
interest are now defined to include participation in good faith in the
Jakarta Initiative, and a new decree defines ‘failure to participate in good
faith’.
The strategy of the government (and the IMF) is obvious: they hope
to make the bankruptcy law work in the way originally intended by
catching the judges of the Commercial Court in a pincer movement: at
the same time that the Attorney General will be making strategic
bankruptcy applications in the public interest, he will also be directing
investigations of possible judicial corruption.

THE RESTRUCTURING OF BANKS

AND CORPORATE DEBTS
The Jakarta Initiative for Restructuring Corporate Debt
The Jakarta Initiative is predicting that agreements to restructure most of
Indonesia’s corporate debt will have been reached by the end of this year.
This forecast includes restructuring deals reached outside the JI, which
focuses on helping medium-sized firms restructure debts of $100–$500
million, while leaving the very large deals of $1 billion or more to be
handled by the conglomerates and their creditors. If this prediction is
fulfilled, it will demonstrate a remarkable acceleration of progress, which
has so far been slow. As of 7 February 2000, only 19 firms had reached
final binding restructuring agreements in the JI with their creditors, and
only another 46 had reached even ‘in principle’ or informal standstill
agreement with creditors. However, over 330 companies were enrolled
in the JI. The aggregate debts of these companies appear to be less than
one-third of total private sector indebtedness to non-residents.15
To date, the two most prominent restructuring agreements to be
concluded within the JI are those involving Danareksa and Sampoerna.
An ‘in principle’ agreement has been reached between the Bakrie group
38 George Fane

and its creditors, and a final agreement is due to be announced soon.

However, reports of the supposedly imminent announcement of this deal
have been circulating for a long time.

The Bank Bailout and IBRA’s Asset Management

and Disposal Programs
In January 2000, Bank Indonesia estimated that the total amount of
government bonds needed to recapitalise the banks would be Rp 621
trillion, which is 51% of GDP in FY 1999/2000.16 In aggregate, the private
banks account for just over half of the total—Rp 332.7 trillion, compared
to Rp 288.2 trillion for the state banks and regional development banks
(table 9). The estimate of the bonds needed has grown rapidly: just one
year ago, it was only Rp 166 trillion, which included interest payments
in FY 1999/2000 (Cameron 1999: 21).
The bonds comprise two parts: (1) those needed to replace the loans
made by BI to banks that failed or were taken over; and (2) the additional
bonds still needed to restore a capital to risk-weighted assets ratio (CAR)
of 4%, which is the minimum permitted level until end-2001, by which
time banks are supposed to have raised their CAR to 8%. The first part—
repaying BI’s emergency liquidity support—comes to Rp 164.5 trillion.
These bonds have already been issued. A further Rp 53.8 trillion has been
issued to BI to refund amounts it paid out in 1998 and 1999 under the
blanket guarantee. The remainder of the second part comes to Rp 402.6
trillion, of which Rp 281.8 trillion has already been issued. With about
80% of the bonds now issued, bank recapitalisation is at last nearing
completion. However, since the bonds that make up the bulk of their
assets are relatively illiquid, and since their CARs are only 4%, the banks
still appear to be fragile.
The government is in the process of merging several of the banks
that it has acquired. Four state banks—Bank Dagang Negara, Bank Bumi
Daya, Bank Exim and Bank Pembangunan Indonesia—have already been
merged to form Bank Mandiri, which is now Indonesia’s largest bank
(JP, 26/1/2000). IBRA also plans to merge ten formerly private banks
that it took over in August 1998 and May 1999. The largest of these, Bank
Danamon, is to absorb the remaining nine. Bank PDFCI was merged into
Danamon in December, and IBRA expects to complete the merger of the
remaining eight banks into Danamon by the end of May (WSJ Interactive,
11/1/2000).
IBRA has been under a great deal of pressure to sell off assets and
restructure debts as quickly as possible. In mid January, apparently
dissatisfied with its lack of progress in selling off its assets, President
Abdurrahman replaced the then head of IBRA, Mr Glen Yusuf, with his
Survey of Recent Developments 39

TABLE 9 Government Bonds Needed to Bail Out and Recapitalise Commercial Banks
(Rp trillion)

Private State All

Banks Banks Banks

1 BI liquidity support 144.5 20.0 164.5

2 Additional recapitalisation 188.2 268.2 456.4
a BI blanket guarantee 53.8 0.0 53.8
b Other, already issued 102.6 179.2 281.8
c Still to be issued 31.8 89.0 120.8
3 Total government bonds (1 + 2) 332.7 288.2 620.9
4 Total issued (1 + 2a + 2b) 300.9 199.2 500.1

5 Fixed interest rate bonds 12.4 26.0 38.4

6 Variable interest rate bonds 320.3 262.2 582.5
Indexed bonds 198.3 20.0 218.3
Interest rate linked to SBIs 122.0 242.2 364.2
7 Total government bonds (5 + 6) 332.7 288.2 620.9

Source: BI (1999): 23. The original estimates have been amended to reflect the fact
that Rp 75 trillion of bonds were issued to complete the recapitalisation of Bank
Mandiri in 2000.

deputy, Mr Cacuk Sudarijanto. The slow progress was caused in part by

the withdrawal of the Standard Chartered Bank from an agreement signed
with IBRA in July 1999 to manage Bank Bali and to contribute the 20%
private share of the new capital needed to raise its CAR to 4%. The
agreement just survived the disclosure of the Bank Bali scandal, but
Standard Chartered withdrew after a violent revolt by Bank Bali’s staff,
who locked out the expatriate management team and accused them of
racism—a charge that Standard Chartered strongly denied (AWSJ
Interactive, 15/12/1999).
IBRA is scheduled to raise Rp 17 trillion in FY 1999/2000 and Rp 16.3
trillion in FY 2000 from asset sales and the earnings of its performing
assets. As of early February 2000, it had raised only Rp 12 trillion of the
target for FY 1999/2000. Roughly half of this amount came from the fact
that the subscription to the rights issues made to recapitalise the private
banks exceeded the 20% minimum share of the total cost of recapitalisa-
40 George Fane

tion that the government insisted private shareholders must contribute

if they were to retain an interest in a bank whose CAR was below 4%.
The balance came from the earnings of its performing assets. IBRA plans
to raise most of the remaining Rp 5 trillion needed to achieve the FY
1999/2000 target by selling its 30% stake in Bank Central Asia and its
45% stake in PT Astra International, one of Indonesia’s most prestigious
companies.17
In January, IBRA reported that 19 of its 200 largest debtors, with
outstanding debts of Rp 13 trillion, are now engaged in debt workouts
and another 10, with Rp 10 trillion of assets, have submitted business
plans and restructuring proposals. IBRA is currently negotiating with
1,000 corporations, in 200 business groups, representing 76% of its
portfolio. By the end of March, it expected to have completed Rp 26 trillion
of debt restructuring deals with corporate debtors (JP, 13/1/2000). Given
its slow progress in the past, such claims need to be treated with caution.

Bank Central Asia (BCA)

IBRA acquired a 30% stake in BCA in 1998 after its owners, the Salim
group and two of Soeharto’s children, failed to repay loans from BI. BCA
was Indonesia’s largest private bank, with total assets of Rp 84.4 trillion,
and 767 branches.
In its LOI sent to the IMF on 22 July 1999, the government stated
(paragraph 28) that it expected the sale of IBRA’s stake in BCA to be
completed during the last quarter of 1999. This target passed and IBRA
did not register the IPO for BCA with the Capital Market Supervisory
Agency, Bapepam, in time to get the deal done in February, as it had
subsequently planned. Bapepam demands 45 days advance notice of
IPOs, and IBRA did not register the IPO until January because of delays
in improving BCA’s credit supervision department. A second potential
problem was that Bapepam’s rules require newly listed companies to
have made profits in each of the two years before listing, whereas BCA
has made losses in each of these years. However, an exception was made
for BCA because its losses were deemed to have been caused by the crisis,
rather than by mismanagement, and because the Stock Exchange believed
that it should not prevent the listing of companies with good prospects
(JP, 4/2/2000). At the time of writing, IBRA expected the IPO for BCA to
go through in March and to raise about Rp 3 trillion.
Since many other large (and small) Indonesian companies are not
already listed on the Jakarta Stock Exchange, it is clearly important to
abolish the rule that newly listed companies must have made profits in
each of the two years prior to first listing.
Survey of Recent Developments 41

Astra International
The fortunes of the owners of PT Astra International have fluctuated
with the fortunes of their banks. The founder of Astra, William
Soeryadjaya, had to sell his controlling interest in the company to repay
depositors after the collapse in December 1992 of Bank Summa, which
was also owned by his family (MacIntyre and Sjahrir 1993: 12–16). The
relatives and business associates of former President Soeharto bought
most of the shares, and his close associate Bob Hasan became Astra’s
President Commissioner in the mid 1990s.
The banking crisis of 1997–99 led to another change of ownership at
Astra. Several of the major new (i.e. post–Bank Summa) shareholders
pledged their Astra shares so that their banks could get liquidity support
from BI during the crisis; others surrendered Astra shares in partial
settlement of the debts of banks that had violated legal lending limits. As
a result of the 1997–99 bank failures, about 45% of Astra’s shares are now
held by IBRA, and it is possible that the wheel may be about to turn full
circle, since the Soeryadjaya family is apparently part of one of the
consortia now seeking to buy Astra.
A successful sale of its Astra shares was essential if IBRA was to meet
its revenue targets for 1999/2000. The sale was also viewed as a test of
IBRA’s capacity to handle the enormous task of liquidating the bad assets
of the banking sector. IBRA had claims on 1.04 billion shares, or 45% of
the total equity in Astra. Since the share price was about Rp 3,750 in
February, IBRA’s total stake in Astra was therefore worth almost Rp 4
trillion. However, it was expecting to raise only about Rp 3 trillion from
the initial sale, because its claims to some of its shares were encumbered.
It proposed to sell these shares to the successful bidder at a later date,
once it had established clear title to them.
In August 1999, IBRA entered into negotiations with an American
investment consortium, led by Newbridge Capital and Gilbert Global
Equity Capital Asia Ltd, which IBRA chose as its ‘preferred bidder’. IBRA
claimed that the Astra management team was uncooperative with
Newbridge/Gilbert’s attempts to obtain the information needed for a
due diligence investigation, and called a meeting of shareholders on
8 February at which it dismissed Astra’s chief executive officer, Rini
Soewandi, and her deputy, while retaining the rest of the management
team.
In mid January 2000, IBRA’s new chairman, Cacuk, demanded that
Newbridge/Gilbert deposit Rp 1 trillion (roughly $136 million) into an
escrow account in accordance with the agreement under which IBRA
42 George Fane

had made it the ‘preferred investor’. Following Newbridge/Gilbert’s

failure to make this payment, IBRA terminated its exclusive agreement
with Newbridge/Gilbert and invited other prospective bidders to make
offers for Astra. At the time of writing it had received expressions of
interest from over 30 investors and hoped to complete the sale in late
March.

16 February 2000

NOTES

1 The annual growth rate is based on BI’s prediction of the level of GDP in the
last quarter of 1999.
2 ‘Fixed investment’ means ‘gross fixed capital formation’ in table 1; ‘investment’
means ‘fixed investment’ plus ‘changes in stock’ (table 1).
3 In February 2000, for the first time since 1997, an Indonesian company was
able to obtain a new offshore loan without relying on a guarantee from a foreign
government or multilateral agency. BA Asia, a unit of Bank America
Corporation, is managing a bank consortium that seeks to raise over $200
million for PT Indah Kiat Pulp and Paper Corporation. More than $100 million
has already been pledged. The cost of the loan to the borrower will exceed the
SIBOR (Singapore Inter-Bank Offer Rate) dollar interest rate by 5.4 percentage
points per year for one-year loans and 6.4 percentage points per year for two-
year loans (Basis Point, issue 368, 5/2/2000). Indah Kiat Pulp and Paper’s
export revenues provide a natural hedge for the loan, which is also guaranteed
by its parent, Asia Pulp and Paper. APP is incorporated in Singapore, but it is
part of the Sinar Mas Group and its core business is in Indonesia; it is one of
the few Indonesian groups not to have defaulted on its debts during the crisis.
4 The Bank Bali scandal was covered in the previous Survey (Booth 1999: 4–8).
Bank Bali paid Rp 546 billion to PT Era Giat Prima (EGP) to handle its claim
on IBRA for reimbursement—in accordance with the government’s January
1998 blanket guarantee of bank debts—of amounts owed to it by banks that
had failed. Following EGP’s efforts on its behalf, Bank Bali received Rp 904
billion from IBRA. Many people had imagined that the government would
automatically pay what it owed, and were shocked to learn that a private
company like EGP could apparently have a large effect on the amount or the
timing of the supposedly guaranteed payments. It was widely suspected that
the payments involved corruption. Since EGP is partly controlled by the deputy
treasurer of Golkar (the ruling political party at that time), it was also suspected
that the payment to EGP included a large covert donation to Golkar.
5 Of this total, just over $4 billion was pledged by Japan, the World Bank and
the ADB. The government is also seeking to reschedule $2 billion in sovereign
debt through the Paris Club of official creditors.
Survey of Recent Developments 43

6 Acknowledging the huge expenditure on the bailout as an on-budget expense

would have been too transparent even for the IMF, which has been content to
go along with the pretence that an expenditure is not an expenditure if it is
paid for with bonds rather than cash. Ironically, this internationally accepted
charade is closely analogous to the most important of the now defunct
Indonesian accounting conventions, according to which a deficit was not a
deficit if it was financed by borrowing, rather than by paying in cash. The
new convention produces much larger errors than the old Indonesian one
ever did, because most of the bank bailout is current expenditure—the assets
acquired by the government are worth only a small fraction of the bonds
issued—whereas the old Indonesian convention was applied only to
development expenditures. Since the bank bailout comes to around half of
annual GDP, the magnitude is also far bigger than any error produced by the
now discarded Indonesian conventions.
7 It also excludes the planned IPO for Bank Mandiri, the new state bank
discussed in the section on bank restructuring. The $1.2 to $1.5 billion that the
government hopes to raise from this IPO is to be used to finance Bank Mandiri’s
own expansion, rather than the national budget deficit. Bank Mandiri intends
to use most of the new equity to finance loans to industrial firms, particularly
small and medium-sized enterprises and firms engaged in debt restructuring
and exporting.
8 The government offered 35% of the shares in Telkom in an IPO in 1995, but
demand was lower than expected, and not all these shares were sold.
9 The household expenditure surveys referred to in this section are the official
Survei Sosio-Ekonomi Nasional (Susenas) carried out by the Central Statistical
Agency (BPS). The 1998 estimate quoted here is Booth’s ‘adjusted’ estimate,
i.e. it uses the same basket of goods to define the poverty line in both periods.
10 This estimate is derived from national accounts data on changes in
consumption, together with estimates of the distribution of the population
around the poverty line.
11 SSSP obtained the 20 to 21% starting point in mid 1998 by adjusting the
estimates of two surveys not undertaken by BPS to put them on a comparable
basis with the BPS estimates. Details are given in SSSP (1999).
12 The targeted fuel subsidies are quite different from the ‘fuel subsidies’ that
are estimated in table 5 to cost Rp 18.3 trillion in FY 2000. The latter measure
the revenue loss to Pertamina from acquiring petroleum at world market prices,
refining it, distributing it and selling it at relatively low administered domestic
prices.
13 SMERU receives contributions and technical support from the World Bank,
AusAID, the European Union ASEM Fund and the US Agency for International
Development.
14 For example, a Jakarta-based NGO accused officials charged with distributing
cheap rice in the Greater Jakarta area of substituting low quality rice for the
higher quality rice supplied to them. The claims were denied by the Jakarta
City Logistics Agency (JP, 26/1/2000).
44 George Fane

15 Indonesia’s total private sector external indebtedness was reported to be $72.46

billion (World Bank 1998), and the firms enrolled in the JI at 7 February 2000
had foreign currency debts of $23 billion and rupiah debts of Rp 14.7 trillion.
However, although some of their rupiah debts are owed to non-residents, the
firms enrolled in the JI probably account for less than one-third of total
Indonesian private external debt, because some of the $23 billion of their foreign
currency denominated debts are owed to Indonesian banks.
16 In February 2000, BI revised this estimate to Rp 639.2 trillion, but did not
publish a breakdown that would allow a full updating of table 9.
17 Astra’s automotive division, which assembles Toyota and several other leading
brands, generates about two-thirds of its revenue. Its other interests include
electronics, agribusiness, financial services, heavy equipment and wood-based
products.

REFERENCES
BI (Bank Indonesia) (1999), Indonesia’s Recent Economic and Monetary
Development, Jakarta (mimeo).
Booth, Anne (1999), ‘Survey of Recent Developments’, Bulletin of Indonesian
Economic Studies 35 (3): 3–38.
Cameron, Lisa (1999), ‘Survey of Recent Developments’, Bulletin of Indonesian
Economic Studies 35 (1): 3–40.
MacIntyre, Andrew, and Sjahrir (1993), ‘Survey of Recent Developments’, Bulletin
of Indonesian Economic Studies 29 (1): 5–33.
Mackie, Jamie (1999), ‘Indonesia’s New “National Unity” Cabinet’, Bulletin of
Indonesian Economic Studies 35 (3): 153–8.
McLeod, Ross H. (1999), ‘Crisis-driven Changes to the Banking Laws and
Regulations’, Bulletin of Indonesian Economic Studies 35 (2): 147–54.
Nasution, Anwar (1995), ‘Survey of Recent Developments’, Bulletin of Indonesian
Economic Studies 31 (2): 3–40.
Pardede, Raden (1999), ‘Survey of Recent Developments’, Bulletin of Indonesian
Economic Studies 35 (2): 3–39.
Suryahadi, Asep, Sudarno Sumarto, Yusuf Suharso and Lant Pritchett (1999), ‘The
Evolution of Poverty During the Crisis in Indonesia, 1996 to 1999’, Working
Paper, SMERU, Jakarta.
World Bank (1998), Indonesia in Crisis: A Macroeconomic Update, Washington
DC, 16 July.
Survey of Recent Developments 45

SURVEY EXTRA

a collection of post-Survey developments compiled by Indonesia

Project staff

GDP was 5.8% higher in Q4 1999 than a year earlier, but still below its
level as long as four years previously; investment spending was still less
than half its level just after the crisis began. Inflation remains negligible,
while the rupiah weakened a little to Rp 7,630/$ at the end of March.
IBRA sold its 40% interest in Astra International at the end of March for
about Rp 3.8 trillion, but postponed the sale of its shares in Bank Central
Asia. The IMF postponed indefinitely its planned April disbursement of
funds because of unsatisfactory progress on several fronts.
Yet another person charged with high level involvement in the Bank
Bali scandal was set free, this time on a legal technicality; the prosecutor
is appealing the decision. Another court has ruled that IBRA acted illegally
in taking over Bank Bali, throwing its, and others’, rehabilitation into
doubt. Mr Bob Hasan, business tycoon and close associate of former
President Soeharto, was arrested on a charge of corruption. Soeharto
himself failed to answer his second summons to appear for questioning
in relation to alleged corruption, sparking a violent protest by students.
Eventually he was questioned briefly at his residence in early April.
Strong protests have resulted in postponement of reductions in
subsidies to fuel users. The lack of support for the reduction—even
though the main beneficiaries of the subsidies are those relatively well
off—is perhaps understandable: the fact that nobody has as yet been
punished despite huge transfers of wealth to the rich from the general
public in the course of the banking crisis makes people reluctant to accept
even greater hardship.
The government seems determined to implement very large pay rises
for high level government employees despite strong criticism from
intellectuals, the parliament and the bureaucracy itself. The reform should
improve incentives for good performance by offering much better
incomes to those who achieve promotion. The strategy behind resistance
from lower level civil servants may be to persuade the government to
provide large increases throughout the civil service, but in the current
straitened circumstances, this would be neither appropriate nor feasible.