Surviving the meltdown: Liberal reform and political oligarchy in Indonesia

Nowhere has the Asian economic crisis been felt with such devastating effect as in Indonesia. A massive speculative attack on the rupiah following the collapse of the Thai baht triggered a rush for dollars by domestic private sector corporations to cover their predominately short-term and unhedged foreign debts (Asian Wall Street Journal (hereafter AWSJ), 31 December 1997; Forum Keadilan (hereafter FK), 8 September 1997 and 12 January 1998). Driven in part by this rush the rupiah was to slump more than 80 per cent in value. Attempts in December 1997 to persuade creditors to roll over the private sector’s short-term debts were unsuccessful and by late January it was apparent that most of Indonesia’s conglomerates were technically bankrupt (Bisnis Indonesia 5 December 1997 and 24 January 1998; Indonesian Observer 26 January 1998). At the same time, the rupiah’s collapse also generated a fiscal crisis for the Indonesian government. Contracting revenue sources and increasing demands for social sector subsidies meant that by mid July, 1998, the government was operating a budget deficit of 8.5 per cent of GDP, leaving it with little option but to reschedule its foreign debt commitments and seek increased amounts of foreign aid. In late July, total budgetary collapse was averted when western creditors pledged US$7.9 billion in loans and grants to the government (AWSJ 31 July-1 August 1998; Jakarta Post (hereafter JP), 21 July 1998)