Indonesia: A Second Shot At Reform?

The Finance Minister may get to flex his muscles under a new President

You could read the optimism in the numbers. Within minutes of the opening bell on Sept. 21, the main index of the Jakarta Stock Exchange rocketed to a record high. Indonesia's currency, the rupiah, surged against the dollar. Few in Indonesia could remember a day when there was so much hope in the air. By a landslide the previous day, former army General Susilo Bambang Yudhoyono had swept aside the three-year-old government of President Megawati Sukarnoputri in the country's first-ever direct Presidential election. On Oct. 20, Megawati is scheduled to become Indonesia's first President in 55 years to hand over power peacefully to an elected successor.

The election came off with a minimum of violence; the one terrorist bombing seemed not to be election-related. The business community hopes the vote heralds an era of peace and prosperity. "Expectations are running very, very high," says Suryo Sulisto, chairman of the Bumiputra Businessman's Assn. Adds Robert Adair, an analyst at brokerage G.K. Goh Holdings Ltd. in Jakarta: "The results signal a strong mandate that Yudhoyono should be able to take advantage of."

Crucial to his success will be the economic team he puts together. There seems to be a broad consensus that the leader should be current Finance Minister Boediono. Yudhoyono's aides have been saying for weeks they would ask Boediono to stay on -- but Boediono's office won't confirm whether he plans to. "Boediono's appointment will be a signal to the markets that Indonesia will stay the course," says Adair. It would also be important politically. Yudhoyono and his allies hold 103 seats in the 550-seat Parliament vs. 307 seats held by Megawati and her supporters. Part of Boediono's job would be to build consensus on economic policy across party lines.

Boediono has been steering government finances since Indonesia verged on bankruptcy in August, 2001. The Wharton-trained economist was regarded as a strong arm in a weak Megawati government. He eliminated most of Indonesia's deficit by slashing subsidies and selling off state companies. He also reformed the crippled banking sector and raised more revenue by cracking down on tax evasion. He turned government finances around so sharply that Indonesia was finally able to exit from the International Monetary Fund's emergency borrowing program.


But much remains to be done. One critical issue is Indonesia's budget-draining oil subsidies -- price breaks given to families and businesses when oil prices are high. Without the $3.1 billion the country will spend this year on subsidies, the government would have a surplus. One solution: subsidizing the kerosene used by the poor for cooking stoves while abolishing subsidies for other users.

The populist President-elect and Boediono want to pull in new foreign investment and increase revenues by exploiting Indonesia's untapped oil reserves. And they share a passionate determination to collect on debts from the end of the Suharto era. During the campaign, Yudhoyono said he'd go after former bank owners who received $16 billion in emergency loans during the Asian crisis, but have so far paid back only a fraction of that amount.

But the Finance Minister and the populist President-elect are in greatest agreement on long-term strategic issues, such as Indonesia's place in the world economy. Both have talked recently about the impact of China and India and the need for the archipelago to develop its own strong economic niches. If other problems -- particularly international terrorism -- don't get in the way, Boediono and Yudhoyono could take the next step in securing Indonesia's economic future.

By Assif Shameen in Singapore

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