It's a tense standoff. In a daring move few analysts expected just weeks ago, Indonesian President Abdurrahman Wahid is demanding the resignation of General Wiranto, the military power broker in Wahid's three-month-old government. But Wiranto refuses to go, stoking fears of a violent showdown between a brutal army and millions of Indonesians who support the democratically elected president.
That's the risk Wahid is prepared to take to get Indonesia's house in order. Wahid is trying to rebuild entire institutions that are critical to reviving the battered economy and restoring investor confidence. He's starting with the military--and that requires sacking Coordinating Minister for Defense & Security Wiranto and other generals who were implicated in mass murder in East Timor and deeply involved in the now discredited regime of strongman Suharto. A successful stand by Wahid also could pave the way for privatization and restructuring of state enterprises, moves now being thwarted by military-backed bureaucrats. It also would enable Indonesia to begin the long-delayed cleanup of debt-plagued corporations.
The biggest threat to Wahid's coalition isn't an outright coup. It is the spector of nationwide ethnic and religious warfare of the type that has broken out on islands such as Lombok and the Moluccas. As in the murderous rampage that terrorized East Timor in September, most analysts are convinced that military-backed saboteurs are behind the jihad, or holy war, that Muslim extremists have declared on Indonesia's Christian minority. In January, Wahid personally glimpsed this threat when thousands of Muslim fundamentalists marched on Jakarta calling for violence against Christians.
CONVENIENT ALLIANCE. Some analysts believe that Wiranto's military-intelligence apparatus has joined forces with Muslim clerics linked to Islamic politicians who have secured little influence in Wahid's government. These factions and Wiranto are poised for "an alliance of convenience" that could cause unrest to escalate, warns Bruce Gale, regional manager of Political & Economic Risk Consultancy Ltd. in Singapore. The objective: to show that the Wahid government, on its own, cannot contain a social explosion.
Wahid is gambling that he can keep power and hold Indonesia together. Since taking office in October, the moderate Islamic cleric has ousted army generals loyal to Wiranto and replaced them with his supporters from the navy and air force. With Wiranto no longer in direct command of any troops and the top brass divided, his chances of mustering enough support for a coup are "next to impossible," says Harold Crouch, an Indonesia military expert at Australian National University. Even pro-Wiranto generals, who have business interests themselves, realize a coup would trigger mass student demonstrations. They also know a regime run by Wiranto, who was just blamed for the East Timor massacres by an Indonesian commission of inquiry, would leave the country without support by international lending agencies and the U.S.
The potential rewards if Wahid prevails, on the other hand, are substantial. On Feb. 2, just after news of the Wiranto sacking broke, a group of foreign donors led by the World Bank, Asian Development Bank, and the Japanese government met in Jakarta and pledged to lend Indonesia $4.7 billion for the fiscal year beginning April 1. But the loans are tied to reform, says World Bank East Asia Vice-President Jean-Michel Severino. And in January, economic policy czar Kwik Kian Gie and Wahid economic adviser Sri Mulyani reached an agreement with the International Monetary Fund that mentioned reining in financial abuses by the military as a key goal.
Besides ordering audits of large military expenditures, Wahid plans to replace the heads of eight inefficient state enterprises. They include national oil company Pertamina, which the army used as a piggy bank under Suharto. Such sackings would pave the way for massive restructuring of Pertamina and a merger between the government's two publicly listed but inefficient telephone companies, PT Indosat and PT Telkom. That merger must be completed before investors take interest in the government's plans to float more telecom stock, says Gartner Group Inc. Asia Director Bertrand Bidaud. Such deals also would enable Jakarta to make good on promises to the IMF to raise $1.2 billion from privatizations.
Dealing harshly with the military may also be necessary to fix other corporate messes. The government's Indonesian Bank Restructuring Agency (IBRA) is in charge of cleaning up the bank sector's bad loans. It has been trying to raise $10 billion by selling collateral it has seized from debtors. One such asset is a 40% stake in conglomerate Astra International. IBRA has pushed for a sale of Astra to a consortium of foreign investors led by Gilbert Global Equity Partners and Newbridge Capital. But Astra's management has prevented the sale by not cooperating with due diligence proceedings. Investment bankers in Jakarta allege that senior Astra executives were emboldened in their dealings with IBRA by long-standing personal ties with generals allied with Wiranto. Astra officials were not available for comment.
CREDIBILITY FACTOR. The fact that Wiranto has now been accused of war crimes in Indonesia shows how far he has fallen since the early days of Wahid's administration. That's when he seemed to have secured a decisive share of power as a Cabinet minister in exchange for quitting the race for vice-president against Megawati Sukarnoputri. In November, Wiranto tried to take control of defense and foreign policy. But Wahid kept these duties in the hands of civilian officials. The two also clashed when Wiranto wanted to declare martial law and personally run military operations in Aceh and the Moluccas to suppress unrest. Wahid overruled him. "The power is with Wahid, not Wiranto," insists Emil Salim, chairman of the National Economic Council, Wahid's innermost circle of advisers.
Wiranto is unlikely to go quietly. But "it's just a matter of time before he gets the ax," says Jusuf Wanandi, director of Jakarta's Center for Strategic & International Studies. If so, Indonesia may finally begin the long and complex process of reform--and of rebuilding credibility with investors.