NOVEMBER 17, 1997
Cover Story


For a region that has felt shock after shock since July, some relief came in the final days of October. The $40 billion International Monetary Fund bailout of Indonesia boosted the rupiah--battered by a 30% plunge since July--by more than 10% and brought a breath of life back to the stock market. Across Southeast Asia, the confidence bought by the infusion helped buttress the currencies and markets of Indonesia's neighbors. For the moment, it seemed, at least one Southeast Asian country was ready to take steps toward abolishing the crony capitalism and unbridled lending that are jeopardizing the region's growth.

Indonesia is the acid test of the IMF's ability to curb the excesses of Asian capitalism. The next few months are critical. The economic downturn has caused at least 2 million layoffs, compounding Indonesia's struggle with devastating forest fires and the worst drought in 50 years. IMF-imposed austerity measures are roiling President Suharto's cronies and family, who are fighting to protect their economic turf. Meantime, Suharto is trying to guarantee a seventh consecutive five-year term as president. Already, student demonstrators are denouncing him. Rioting is predicted. ''The challenge is how to implement the package without creating social unrest,'' says Rizal Prasetijo, economist at Jardine Fleming Nusantara in Jakarta.

''PROBLEMS.'' How much change the IMF package can bring to Indonesia is hotly contested. Jakarta agreed to remove some import barriers, dismantle part of its food-distribution monopoly, and close 16 banks, including some belonging to Suharto family members. But Suharto will have to stop his family from sabotaging these moves. ''There are going to be a lot of problems with implementation,'' says Nicholas Brooks, an economist with Peregrine Securities Singapore. ''The question is in the details.''

The main obstacle is the nature of the Suharto system itself. The President's children and friends are virtually synonymous with Indonesian Big Business. At least some of the IMF's attempts to separate the two realms are cosmetic at best. Even though a number of banks are being liquidated, finance-industry sources say four heavily indebted banks avoided the chopping block, perhaps because of their connections to Suharto. They include Bank Yama, owned by Suharto's eldest daughter, Siti Hardiyanti Rukmana, known as Tutut, and Bank Utama, linked to Suharto son Sigit Harjoyudanto. Both banks received infusions of capital from other well-connected banks on the eve of the closures.

Among the well-connected banks that were liquidated, trouble is brewing that will severely test Indonesia's dedication to reform. Another Suharto son, Bambang Trihatmodjo, who owns 25% of liquidated Bank Andromeda, filed a lawsuit against Finance Minister Mar'ie Muhammad, accusing him of a political move to disgrace the Suharto family. Suharto's half-brother Probosutedjo, who owns Bank Jakarta, defied the IMF by keeping his bank open and honoring depositor withdrawals. Whether the political heavyweights will accept their losses remains to be seen. ''There is definitely a danger the IMF package could unravel,'' says Jonathan Harris of HSBC Securities in Jakarta. ''Political issues could come back to haunt everyone.''

RICE BOWL. The IMF plan leaves several controversial projects unscathed. They include the national car program in which Suharto's youngest son, Hutomo Mandala Putra, or Tommy, imports cars duty-free from South Korea. Tommy becomes chairman of Timor Putra Nasional, instead of president, and keeps a controlling equity stake. Even though the company's cars are selling poorly, local banks may still be forced to lend $690 million to Tommy's company so it can start assembly in Indonesia.

The IMF, however, wants to break up the government's food-distribution monopoly, called Bulog, that is run by a close Suharto associate. The fund is angling to open the market to competition. But the new rules leave untouched Bulog's monopoly on rice, Indonesia's biggest farm commodity.

Just a few months ago, any suggestion that Indonesia would close politically connected banks or break up monopolies would have been laughed at. So anything the IMF can achieve is major progress. ''This shows they're being firm. That has psychological and political impact,'' says a banking analyst at a Jakarta brokerage. But the battle between Suharto Inc. and the IMF will be hard fought and prolonged.

By Michael Shari in Jakarta, with Sheri Prasso in New York