Indonesia: From Uncertainty to Certainty

Mar'ie Muhammad
Former Finance Minister, Indonesia

Conference on Crisis & Credit: Restructuring Asia's Financial Sector
Asia Society, 1 October 1999
New York City

I am delighted to share my views, my sentiments and feelings at the Asia Society Forum, since this forum will enhance and build better understanding among people with different cultural backgrounds. I appreciate this opportunity to speak and would like to thank very much the organizer who gave me a chance to share my views concerning Indonesia, which is now under the focus of international attention.

Let me begin with the recognition that Indonesia is now confronting a multi faceted crisis. For thirty years Indonesia was under the command of one president acting as a strong man, and now socially Indonesia is highly fragmented. In this environment, unfortunately we do not have effective national leadership and even I might say we are facing a crisis of national leadership. This is true in a case of human tragedy in human crime in East Timor that happened after the announcement of the result of the ballot. I am sure what happened in East Timor is completely self-destructive to the image of Indonesia in a global sphere and that the tragedy is out of the control of the central government. This statement is completely an honest statement and not apologetic.

Indonesia should admit the dark side of its venue, not only in East Timor but also in other parts of the country like what happened in Aceh. For this tragedy, Indonesia should take necessary actions to demonstrate to the world that we belong to a civilized nation and society, including to investigate and to take to trial people who are responsible and involved in these human crimes.

The decision of the government to provide an option for Independence of the East Timorese people is completely a breakthrough for the new era of the East Timorese people. Now, it has become an international obligation to restore peace and order and to speed the process of transition for the Republic of East Timor as an independent state.

Meanwhile, ethnic conflict, in some areas accompanied by religious intolerance, occurred in some places. Simultaneously, the separatist sentiments outside East Timor, like in Aceh, also happened to be associated with ethno-nationalist phenomena.

Since the wide spread of corruption happened almost in all segments of the public sector, the government lost its credibility and further it produced a lack of trust in the society as a whole. Bad governance also happened in the corporate sector. The Bank Bali scandal demonstrated clearly a perfect collusion for the bad governance between public officials and the corporate sector. In this regard, the Bank Bali scandal should be opened in a transparent manner based on a full investigative report and they who are involved in this scandal should be taken to the impartial court.

In this month, we do expect that a new president will be elected smoothly. The new government, which will be fully legitimate with broad political support, will come on screen soon.

From these observations above, we can conclude that Indonesia is confronted with too many uncertainties and that it is now the challenge for Indonesia, in collaboration with the international community, to convert these uncertainties and even enigmas to certainties.

In doing business, it is too difficult to assess the risks if the investor is confronted with too many uncertainties. Simultaneously, now we are in the process of recovering democratization as a part of political reform.

In this regard, I would like to urge the international community to contribute positively in the process of democratization through empowering the political institution and civil society.

Let me now begin by highlighting some remarks on our focus of discussion today concerning financial and corporate sector restructuring. The crisis left a costly economic legacy that will be with us for many years to come. This will produce severe strain on government finances caused by a devastated, dysfunctional banking sector and a depleted indebted corporate sector.

Severe conditions of the banking and corporate sector include the following:

• High levels of corporate borrowings, usually short-term and in unhedged foreign currencies;
• Poor banking practices and supervision that resulted in the misallocation and, more gravely, misappropriation of funds; balance sheet mismatches and insufficient provisioning;
• Pervasive corruption; collusion and nepotism; and
• Perhaps, least recognized of all, fundamental changes in the global financial system, which rewarded Indonesia handsomely for many years but, just as easily, punished the country during our time of crisis.

As a result, the banking sector recapitalization is very costly, with the total around 550 trillion rupiahs (Rp) or around US$70 billion. If one compares this with other countries in the region, recap cost in Indonesia in percentage to GDP is the highest -- around 50% -- whereas in Thailand, Malaysia and Korea the recap is only 17% to GDP. The huge amount of funds needed for banking recap will produce substantial pressure to the Indonesian budget, and this means a burden for the public. Concerning corporate restructuring, corporate governance including transparency is highly critical. The key issues for moving forward on corporate governance are straightforward:

• Fairness: protecting the interest of minority stockholders from fraud, self-dealing and other irregularities;
• Transparency: improving disclosure of company performance information in a timely basis and accurately;
• Accountability: creating an effective control system based on distribution of power among the board of directors, managers, shareholders and auditors; and
• Responsibility: responding to the stakeholders and the environment in which the corporation exists.

The key challenges of corporate debt restructuring in Indonesia include the following:

• Indonesia's bankruptcy laws are weak compared to other Asian countries;
• Recent failures by the court to declare debtors bankrupt;
• Many Indonesian debtors lack transparency - they are unwilling to disclose information to third parties;
• Many of Indonesia's largest corporate debtors are affiliated with political power;
• Willingness of debtors to come to the table and negotiate in good faith; and
• With the banking sector still unwilling to lend and debt restructuring still in progress, many companies face substantial working capital shortfalls.

It is well understood that corporate restructuring is a very complex process. And for Indonesia it is becoming more complex since there is a conflict of interest arising from ownership concentration. Also the judicial system and the bankruptcy law are not yet acting as a credible threat. Despite these shortcomings, corporate restructuring has shown some progress.

I believe that the period between now and when the new government takes office is a time for taking stock, a time to analyze and weigh economic strategies and to finish drawing the road map for sustained medium and long-term growth. Given our resource- based, human and physical capital, our capacity to rebound is great. What we need is a good political climate, and that is democracy, sound development and the implementation of economic and social policies, and support from international community.

Certainly there are hopeful strong signs for the Indonesian economy, which has been battered over the past two years. However, such hope is highly dependent on the political situation in the country.

Whatever the next government will look like, and whoever will lead Indonesia into the millennium, will have a nearly impossible task of reviving the real economy while: strengthening the banking and financial sector; uniting the fragmented sectors of the society; as well as fulfilling the aspirations of the Indonesian people who have put so much hope in the new Government. Dwelling only on our past mistakes and holding grudges against each other will only hinder progress and may endanger our still fragile democracy. Indeed, the Government must regain the trust of its citizens so that together we can be true partners for reform. The state and the civil society have to join hands in healing the wounds brought about by the past regime. This is a long and continuous struggle, and we appreciate the support and encouragement of our friends and neighbors, who are also our partners in building a stronger foundation for a better future.