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Thursday, January 8, 1998 Published at 13:10 GMT



Special Report

Indonesia: economic weaknesses exposed
image: [ Jakarta city centre ]
Jakarta city centre

The Indonesian rupiah has fallen in value against the US dollar by over 60% since July 1997, the most dramatic fall of all the Asian tiger economies.

The Decline

Since 1970, Indonesia had seen its real gross domestic product grow by an average of 7% a year. Its success was due to prudent economic policies, high investment and savings rates, and a market-oriented trade regime.

But like many of the Asian tigers, Indonesia's strong overall performance masked a number of underlying weaknesses that left Indonesia's economy vulnerable. Widespread accusations of government corruption upset investor confidence and its weak banking system was unprepared when foreign investors started to pull out and speculators attacked its currency.

The Indonesian rupiah hit a record low against the US dollar in August. In October, it asked the IMF for help.

In December, the rupiah fell even further against the US dollar, amid speculation about the health of President Suharto and worries about who will eventually succeed him.

Response

A $40bn package was granted by the IMF in November 1997 to help rescue the Indonesian economy.

But in January 1998 the new Indonesian budget designed to steer it out of its economic crisis was given a cool response. Analysts commented that it did not go far enough to implement the austerity programme demanded by the IMF.

Now President Suharto has agreed to a series of drastic reforms. Under the deal, monopolies and businesses connected to President Suharto's children will be dismantled or cut back; government budget figures are to be revised to more realistic levels; and food and fuel subsidies will be cut.

Few signs of recovery in business confidence

Of the 228 companies listed on the Indonesian stock exchange 70% are technically bankrupt, including the entire property sector.

In recent weeks Indonesia's currency and stock markets have been in virtual free-fall. Indonesians, terrified by the prospect of factory closures and rising unemployment, indulged in panic buying, jostling each other for supplies of sugar and cooking oil.

76 year old President Suharto has also come under unprecedented pressure to stand down. The fear remains that Indonesia's economic problems could lead to massive unemployment and have repercussions around the world.






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