Getting Back to Basics in Jakarta

Megawati's survival plan: Stabilize finances and simplify industry

After she spent nearly two years watching her predecessor's slow-motion political suicide, some wondered how quickly Indonesian President Megawati Sukarnoputri would move to prevent her country from disintegrating further. Surprisingly, she has been a blur of activity. With the economy expected to grow just 2% this year, Megawati knows she must move fast to appease the International Monetary Fund, obtain debt relief, and pass an overdue budget.

The President's policymakers have devised what amounts to a three-stage strategy for survival. In the short term, they plan to roll over billions in foreign debt, borrow more from the IMF, and cut a deal with secessionist rebels who are spooking investors. The midterm phase, which could take two or three years, involves selling broken banks and corporations--including state-owned enterprises. The long-term goal is to temper aspirations of moving up the value chain, focusing instead on agricultural exports and labor-intensive manufacturing until the economy stabilizes.

Megawati got loud cheers for picking a Cabinet of accomplished technocrats. And her economic stewards are well placed to cut deals with international agencies. In his previous post as ambassador to the U.S., newly appointed economic czar Dorojatun Kuntjoro-Jakti dealt with the IMF, the World Bank, and the U.S. Treasury. Trade & Industry Minister Rini Soewandi, ex-CEO of carmaker Astra International, is the daughter of a former representative to the IMF. After meeting with Indonesian ministers, senior IMF official Anoop Singh said: "What we have seen and heard makes us optimistic."

Getting the fund on Jakarta's side is a crucial first step. Megawati hopes to persuade creditor nations to roll over $3 billion in short-term loans. But the IMF's lending program must be active before any of the outstanding $70 billion in debt can be rescheduled. The fund halted payments to Indonesia a year ago when the government balked on reform. If all goes well, the IMF will soon release $400 million, which Jakarta will use to help plug a budget deficit.

OLIVE BRANCH. To restore investor confidence, the government will have to do what its predecessor failed to: privatize state-owned corporations and auction off seized banks and companies. Megawati has signaled her willingness to disregard vested interests opposed to selling the nation's crown jewels. And she has won plaudits for putting Laksamana Sukardi in charge of the Indonesian Bank Restructuring Agency, which holds many of the assets at stake. A former Citibank executive, he is a champion of transparency.

Another priority: making Indonesia safe for multinationals. On that front, a new law promises Aceh province a 70% share of aftertax gas revenues, which Jakarta hopes will persuade separatists to halt their struggle. A similar law is likely to be enacted for West Papua province, where Freeport-McMoRan Copper & Gold Inc. operates a $3 billion mine under constant threat of guerrilla attack. Next up perhaps is Riau province, where attacks on oil fields have forced Caltex Petroleum, a joint venture of Chevron and Texaco, to cut production.

Hardest of all is accepting that Indonesia must go back to basics. This is a step-down from the Suharto years, when the government hoped to make Indonesia an industrial powerhouse, and wasted billions trying to build viable aircraft, petrochemical, and automobile industries. Nowadays Jakarta is talking about making chocolate bars, rather than exporting cocoa. "It's an embarrassment," says economic czar Kuntjoro-Jakti. "But sustainability is the goal."

It looks as if Megawati's smart management will stave off economic disaster in the short term. Ultimately, however, Indonesia will have to move up a level. "The economy has grown based on barriers and monopolies, which don't encourage competitiveness," says Soewandi. Reviving the economy, she adds, "will take time." Indonesians, like their President, will need to be patient.

By Michael Shari in Jakarta

    Before it's here, it's on the Bloomberg Terminal.