For Fuad Bawazier, the financial crisis that moved like a wrecking ball through the Indonesian economy two decades ago remains a source of deep regret.
By 1998, Indonesia was in full-blown crisis: the economy contracted 13 percent, millions of people were pushed into poverty and hundreds were killed in riots that eventually led to Suharto stepping down after more than 30 years in power.
His rule had been marked by rapid economic growth, but also large-scale corruption — which had enriched his family and inner circle — and repressive, militarized control. It would take years of political upheaval, punctuated by sectarian and ethnic violence and more graft scandals, for Indonesia to eventually recover.
Today, the Southeast Asian nation stands in stark contrast to what it was 20 years ago: It’s now a vibrant democracy with a more resilient economy, near-record foreign-currency reserves and investors lining up to tap a growing and youthful population. It has Southeast Asia’s largest economy that’s posted annual average growth of more than 5 percent in the past five years.
The crisis had also forged a new crop of leaders and reformers, led by President Joko Widodo and his Finance Minister Sri Mulyani Indrawati, who are working hard to keep the nation on track.
Indrawati, 54, returned to Indonesia last year after a stint as a managing director at the World Bank, promising to tackle corruption and clean up the tax system. Describing herself as an “economic activist,” her commitment to reform was shaped by her experience during those student protests on the streets of Jakarta in 1998.
“During her past year back in office she’s been cautious, and understandably so, but strictly professional,’’ said Kevin O’Rourke, a political analyst and author of “Reformasi: The Struggle for Power in Post-Soeharto Indonesia,” who was a stockbroker based in the capital during the crisis and the demise of Suharto’s regime.
Indonesia isn’t immune to financial shocks, but is much better prepared for them, according to Indrawati. The crisis that began in 1997 destroyed the foundation of the financial system, and today “there is better and more consistent governance of the financial sector and better risk management,’’ she said in June. The financial regulator, known as OJK, and the “central bank are more independent and have greater credibility in terms of enforcing prudential rules.”
O’Rourke said there had been obvious and dramatic changes over the past 20 years, including the rise of an Indonesian middle class, a more decentralized government and the military’s influence in politics diluted.
Yet Indonesia remains a very inward-looking nation that doesn’t live up to its potential as the world’s fourth-most populous nation and 10th largest economy. O’Rourke said that’s because of a three-way struggle that exists between a patronage system that entrenches the influence of political elites, religious and ethnic tension in politics and reform-minded officials, who want to get the economy onto its next stage of development.
Foreign observers were reminded of that tension recently, when governor of Jakarta, Basuki Tjahaja Purnama — Widodo’s political ally, who is a Christian of Chinese descent — was jailed for blasphemy in a test of religious tolerance in the world’s most populous Muslim nation.
The reformers are “the ones now on the defensive and this is the same struggle that has been playing out for 20 years now,” said O’Rourke. “That three-way tension is what has been occupying the attention of politicians and rendering Indonesia very inward-looking.’’
For investors, Indonesia has come a long way from the turmoil of 1998. Evidence of that came in a recent credit-rating upgrade and the currency’s rebound in the immediate aftermath of Donald Trump’s victory in the U.S. election in November — the so-called ‘Trump tantrum’ when emerging markets sold off.
Reserve buffers aside, Indonesia has policy credibility and is on a sounder economic footing, said Weiwen Ng, an economist at Australia & New Zealand Banking Group in Singapore.
“What is under-appreciated is the fact that macro fundamentals are clearly much better now compared to 20 years ago and that reinforces the view that Indonesia, along with the rest of Southeast Asia, is clearly much more resilient now,” he said.