Two Cheers For Jakarta - political situation in Indonesia

Indonesia political distractions of recent times have left the country around a year behind its neighbors in the cyclical economic-recovery process. However, events have panned out as well as one might have hoped over the past six months. Most Indonesians, plus the international donor community, seem intent on giving President Abdurrahman Wahid (also known as Gus Dur) a honeymoon period of support. Some are complaining that Wahid's erratic leadership style is unsuited to running a government of 200 million people. Compared to the previous regime's policy paralysis, however, almost anything is an improvement. Besides, most people tend to learn on the job. Ongoing cabinet reshuffles and purges should also provide a clearer picture of who is running the show and the direction of policy. At least that is the bullish case.

The current situation provides some breathing space and reduced political risk, assuming separatist guerrillas in the province of Aceh and other simmering separatist groups are controlled. Unlike East Timor, the world appears to have no interest in supporting Aceh's separatist movement -- aside from Libya's Colonel Ghaddafi and a few other unsavory characters. Containing the tension will provide immense relief to many of Indonesia's neighbors -- most notably China -- who also have smouldering pockets of independence fighters. And assuming the U.S. economy holds together, broader global and regional themes suggest a strong economic upturn for Indonesia over the next 6 to 12 months.

Although Jakarta is starting from a worse position than all of its peers, the first shoots of recovery are appearing from the rubble. Imports and exports (oil and non-oil) are on the rise, supermarkets and shopping malls are seeing better business, and traffic jams have returned to the capital. Moreover, some progress has been made in addressing the black hole that is the banking sector, though one should remember that the starting point of an NPL ratio of 60 percent of GDP is around four times the level of the Mexico bust in 1995.