Megawati's Short Honeymoon

Indonesia's new President must find the emergency brake--fast

Minutes after nationalist heroine Megawati Sukarnoputri was sworn in as President of Indonesia on July 24, her longtime economic adviser descended the grand front steps of the Parliament building. A reporter asked the aide, Laksamana Sukardi, a member of Parliament and a former Citibank executive, about the new government's economic policies. "The key is to bring the economy back to normalcy," he said awkwardly as he moved toward his limousine. Megawati would do what she could to defend "the little people," he added hastily before his chauffeur whisked him away.

The Megawati government will need to come up with better answers than that--and fast. After enduring 21 months of erratic leadership under former President Abdurrahman Wahid, who was impeached on July 22, many manufacturers, banks, and international lending agencies are waiting to invest anew in the world's fourth most populous nation. Indeed, the day after Megawati was sworn in, the rupiah strengthened 10% against the dollar.

But given the plethora of problems facing Indonesia--from plunging exports to fears of renewed political unrest--the enthusiasm won't last without decisive leadership. That could prove to be Megawati's biggest flaw. Unlike the Philippines, where President Gloria M. Arroyo brought a seasoned economic brain trust and a clear agenda into office when she took over after the peaceful ouster of Joseph Estrada in January, Indonesia's new team is in flux. Even though her rise to power was widely anticipated for months and Megawati's advisers were thought to be working on an economic blueprint, they have offered few concrete proposals. Megawati didn't even mention the economy in her acceptance speech. After rising 2% the day after she took office, Jakarta's stock market plunged again.

To be sure, Megawati's election came a bit earlier than she expected. And Jusuf Wanandi, director of the think tank Center for Strategic & International Studies, figures she "will lay out her policies after she forms her Cabinet." Still, there are no quick fixes to the mess Megawati is inheriting. The economy has never fully recovered from the mid-1997 financial collapse and the riots that followed. The rupiah is still 75% off its precrisis level. During his presidency, Wahid, a blind Islamic cleric, sacked well-respected technocrats and never delivered on key financial reforms. After a decent 2000, when the economy expanded 5% thanks to rising oil and gas prices, growth this year is expected to be less than 3%. That's not enough for Indonesia to rebuild itself--or provide jobs for the 2.5 million people joining the workforce each year. And while Jakarta approved $3.4 billion in foreign investment in this year's first four months, up 52%, there's no sign that the money has arrived yet. Indeed, Indonesia has suffered a net capital outflow of $6.8 billion as investors bail.

ARMY SUPPORT. To stabilize the economy, Megawati must quickly mend fences with the International Monetary Fund, which has suspended its loans since December due to dissatisfaction with financial reform. On that count, Sukardi, a close Megawati adviser since 1993, says the new government will cooperate. "We have to work with the IMF because they represent donor countries," he says. "We won't always agree on everything, but we can work together." With $28 billion in foreign reserves, Indonesia has the money to repay on schedule in September $1.6 billion of the $11 billion it owes the fund. But Jakarta wants new IMF loans to improve its creditworthiness with other foreign lenders. "Without that seal of approval, there is no guarantee of the country's debts," says U.S. Ambassador to Indonesia Robert S. Gelbard.

More important, investors are unlikely to return en masse unless Megawati somehow quells the unrest percolating across the archipelago. She will need the cooperation of Wahid, who still insists he's the legitimate ruler but is expected to go to the U.S. for medical treatment. Islamic backers of Wahid have kindled riots in his political base of East Java. Diplomats fear the violence could spread to Jakarta. Meanwhile, Megawati has received heavy support from powerful generals, who may want to reassert their traditional authority in policymaking. The political situation "dwarfs everything," says David Cohen, macroeconomic forecasting director for Standard & Poor's MMS in Singapore. "It remains unclear she will be able to restore order any better than Wahid."

STAYING PUT. If Megawati can restore a semblance of order, however, Indonesia's picture could brighten considerably. All through the turmoil of the past few years, a number of multinationals have stuck it out--and say they are doing fine, thanks, due to the cheap currency and wages of only about $47 a month. Nike Inc., which buys much of its footwear from plants in Jakarta, says it has no plans to move despite a recent upsurge in strikes. L'Oréal, which originally built its factory to penetrate the local market, now exports 70% of its output to China and the rest of Southeast Asia. Minneapolis-based VisionEase Lens Inc. built a $2.5 million eyeglass lens plant on the outskirts of Jakarta in 1998. Since then, wages have remained cheap in dollar terms and the plant's output has expanded fourfold. "We are already established here and do not have to undergo the pains of setting up a new plant," says VisionEase Managing Director Milind Gadre.

Even Exxon Mobil Corp. has returned. In March, the oil giant shut its $3 billion Arun natural gas field and liquefaction plant in Aceh province after repeated attacks from separatist guerrillas. That cost national oil company Pertamina some $350 million in exports--equal to 1% of gross domestic product. But in late June, after military intervention, Exxon Mobil partially resumed operations. Human rights activists fear military repression on West Papua, site of Freeport-McMoRan Copper & Gold's $3 billion gold mine, and in Sumatra, where Chevron and Texaco have an oil venture. Both projects have been disrupted by protests.

Megawati's military ties make analysts nervous. Already, human rights activists accuse the army of civilian atrocities in communities it suspects of harboring rebels. And since the military's support was vital to Megawati's ascent, most analysts expect the generals will have freer rein in the provinces. If a crackdown gets ugly, Megawati could damage relations with the West--and stoke an angry backlash in Indonesia.

Of course, the Megawati government is less than a week old, and nobody knows for sure what she will do. While she doesn't yet seem to have a game plan, "Megawati has the capability to put together a strong economic team," notes Ambassador Gelbard. With the drama of her election past, attention will focus on the advisers she chooses to fill the blank pages of her policy book.

By Michael Shari in Jakarta, with Mark L. Clifford in Hong Kong

— With assistance by Mark L Clifford

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