Prospects for the Near and End Term

Oleh : J. Soedradjad Djiwandono
Gurubesar tetap Ilmu Ekonomi, Universitas Indonesia

Pointers for a presentation at James J. Shin Roundtable Series,
Council on Foreign Relations, New York, December 2, 1999.
J. Soedradjad Djiwandono


  • Despite its relatively better macro conditions and better policy responses at the start, Indonesia has become the worst crisis country in Asia. Why is this so and what are the implications to the region?

  • General views: the crisis is behind Korea, it is bottoming out in Thailand and some cautious optimism in Indonesia.

  • Cautious optimism for the near term prospects of Indonesia: Positive reactions on the Election of June and the coming of Gus Dur-Megawati leadership. The good news and the concerns, what are they?

  • Paul Krugman, "Asia Recovering? It may be a false dawn" ( Business Times, Singapore, August 1999 )


  • In general to end the crisis there has to be a turning point which should come from politics, like a change in government. It was very clear in Korea and Thailand. It also explained why Habibie government could not produce a turning point.

  • With a democratic election of DPR and generally more transparent election of President and the Vice President the new national leaderships received legitimacy that could produce a turning point. The turning point stopped the process of downward spiral of economic, social and political deterioration.

  • But, from stopping a deterioration process to initiating a recovery and beyond other requirements should be fulfilled. This is when concerns start popping out.

  • Out of many factors causing or contributing to the economic crisis, two problems considered to be critical : First, weaknesses in the banking system. Secondly, unsustainable corporate debts in foreign currencies (dollar)

  • Weak banking system : banks' problems, weak financial infrastructures, lack of transparency and weak governance. Problems of bank re-capitalization and restructuring, IBRA performance and its problems : economics, social and politics. Bank scandals and their resolutions

  • Financial infrastructures: BI independence, problems of bank supervision, regulations and judiciary problems. A new hope in the recent administration? Recognition of separation of powers (trias politica). How about governance and transparency?

  • Additional problems : misunderstandings and wrong perception about banking and banking problems and their solutions.

  • Corporate debts: issues of moral hazard: fixed exchange system? Government guarantee? Perception seems to be more important than substance.

  • What to be done domestically: monitoring? Or capital control? Market discipline in risk taking.

  • Internationally? How to make financial supervision reach lenders in assessing risks in their lending policies. What has been done in multilateral institutions? The new international financial architectures; transparency and good governance, introduction of international standard. Balanced between standards that are internationally accepted and at the same time appealing for countries to adopt them.

  • Some concerns arise from: the compromised Cabinet which produced unity could be at the cost of its effectiveness and professionalism; putting IBRA directly under the President signaled some fight for its control by political interest rather than the national interest for fastening the process of banking restructuring. Less focus on getting the banking sector back to its normal condition to serve the national economy toward recovery; Aceh and other regional problems. In short, even though market general reaction has been very positive to the new team of national leadership, some concerns are valid. Thus, in the short term the prospect is cautiously optimistic. And so is the long term.


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