Worries Grow About Indonesia

U.S., IMF Officials Fear Unrest Could Spell Financial Trouble for Asian Neighbors.
By Paul Blustein

A nightmare scenario about Indonesia is haunting the Clinton administration, the International Monetary Fund and other policymakers around the world. Discontent in the island nation over soaring food prices and joblessness, they fear, could engender an explosion of violent unrest that would frighten investors in neighboring economies and cause the entire Asian financial crisis to deepen anew.

The nightmare was invoked yesterday by Indonesian Finance Minister Mar'ie Muhammad, who virtually dared the IMF to pull the plug on its rescue of his country, the world's fourth most populous. Administration and IMF officials have indicated this week that Indonesia is in danger of losing access to its $43 billion international bailout because of President Suharto's failure to implement economic reforms.

In a statement, Mar'ie warned that if the IMF withholds or delays the $3 billion loan installment scheduled for mid-March as some officials have predicted, it "will not only adversely affect Indonesia but . . . will have a negative impact on efforts to strengthen and to stabilize currencies in Southeast Asia."

Mar'ie's statement, though couched in promises to iron out differences with the IMF, raised the stakes in the looming showdown between Jakarta and Washington over the terms of the international rescue. Clinton administration and IMF officials responded with carefully worded statements aimed at averting further escalation without retreating from demands for reform.

"We want very much to see Indonesia succeed by taking the necessary steps," said Deputy Treasury Secretary Lawrence H. Summers. "Evaluating their progress, and judgments about timing, are up to the IMF." An IMF spokesman said while the fund hoped to make a "speedy" decision on the loan installment "as soon as the basic conditions are met," IMF procedures would force a delay until at least April.

Privately, administration and IMF officials acknowledge the risk that turmoil in Indonesia could drag down the economies of countries such as Thailand, Malaysia and the Philippines, which have staged fragile recoveries from their own crises.

Indeed, Washington has quietly started to help Thailand build its defenses against a new financial conflagration, though officials are careful to avoid saying the moves are specifically designed as a firewall aimed at containing Indonesia's problems.

In innocuously worded statements this week congratulating Thailand for receiving an additional installment of its $17 billion bailout, IMF Managing Director Michel Camdessus and U.S. Treasury Secretary Robert E. Rubin included pledges that Bangkok could obtain even more money if necessary.

An IMF spokesman said the statement wasn't related to Indonesia. But admitting that the fund doesn't normally make such open-ended pledges of more money, he said, "These are not normal times. In the case of Mexico, for example, we did not have a regional crisis of the same order that we do in Asia."

In a sign that worries about contagion are well-founded, Southeast Asian currencies and stock markets sank yesterday following a 10.5 percent plunge in the Indonesian rupiah Thursday and another sharp slide Friday that reversed late in the trading day. The rupiah closed at 10,500 per U.S. dollar, about three-quarters below its value last summer.

The financial crisis has triggered rioting in a number of towns across Indonesia -- mostly aimed at the wealthy ethnic Chinese minority -- as factories close, construction projects grind to a halt and prices of basic foods such as rice and cooking oil surge. At the root of the crisis is the weakness in the rupiah, which makes imports hugely expensive and renders many Indonesian firms unable to buy the raw materials from abroad they need to maintain production.

Now, as the economy continues to deteriorate, worries are mounting that Indonesia could be wracked by the sort of carnage it experienced in the mid-1960s, when hundreds of thousands of Chinese were killed, mostly at the hands of the Muslim majority. And the potential consequences of such violence on the region's economic and political stability are weighing heavily on international policymakers as they agonize over whether to keep extending lifelines to Suharto or take a hard line aimed at forcing compliance with IMF prescriptions.

"It's genuinely not clear" whether social chaos in Indonesia would translate into financial trouble in neighboring countries, said one senior U.S. official. "There has been a substantial amount of differentiation over the course of the past few months," as investors pour money into South Korea and Thailand while shunning Indonesia. "However, let's put it this way: The risk [of severe contagion] is non-trivial."

Indonesia's economy is small enough -- even before the crisis, its gross domestic product was about 3 percent of the U.S.'s GDP -- that its further collapse wouldn't matter much in financial terms, according to officials and private analysts.

But officials and experts say there are many ways in which political tumult in Indonesia could prove hard to contain. Robert B. Zoellick, a former U.S. undersecretary of state, cited the possibility that anti-Chinese pogroms could erupt in Indonesia. That would threaten to unsettle markets in neighboring countries with large Chinese populations and histories of ethnic strife, he said -- even if the violence itself stayed limited to Indonesia.

"I was just in Asia, and when I asked what their major concern was, everyone said Indonesia," said David Hale, an economist with Zurich Kemper Investments in Chicago. "Say you had civil war, or conflict between different factions of the military. I'm not predicting that, but the downside would be horrific -- massive capital flight, boat people and interruption in the shipping lanes. Forty percent of the world's shipping tonnage goes through Indonesian territorial waters every year."

All this helps explain why Indonesia's financial woes have become a major foreign policy preoccupation of the administration, replete with frequent strategy sessions in the White House situation room, presidential phone calls and the dispatch of high-level emissaries to Jakarta.

The administration message to Suharto is that he is severely undermining market confidence by backsliding on promises he made to the IMF to eliminate monopolies and subsidies that benefit his relatives and tycoon cronies.

But the emissaries' ability to sway Suharto has been compromised by the Indonesian leader's disillusionment over the failure of the IMF rescue to buoy the rupiah.

"It's fair to say he is not yet convinced that the IMF package will get him out of the mess," a White House official said. "I do think that it's a positive sign that he's spending time with these people. He's listening. But there's no guarantee how this is going to come out. We're clearly at an important moment."

Copyright 1998 The Washington Post Company