Bad Bank, Bad Politics, Bad News for Indonesia

Indonesian President Susilo Bambang Yudhoyono’s ruling coalition looks to be teetering on the edge of ruin following a decision last night by two of his supposed allies on a House of Representatives committee to name two of the president’s most trusted officials as culpable in the US$716 million bailout of the failed Bank Century in 2008.

The president himself may be irreparably damaged by the fact that he has proven unable to keep two of his main coalition partners, Golkar and the Islamist Prosperous Justice Party (PKS), from naming Vice President Boediono and Finance Minister Sri Mulyani Indrawati as having violated the law in the bailout.

Despite the language of legality employed by the special committee investigating the bailout, it has been a raw political exercise since it began in December, with politicians seemingly using the committee forum to hammer away at the two officials, especially Sri Mulyani, whose reform policies on taxation and other measures have hit hard at traditional business practices. As technocrats, neither of the two officials have any real political party support.

If the two are driven from the government, it would be a signal victory for Aburizal Bakrie, the powerful head of Golkar and the tycoon who heads the Bakrie group of companies. Bakrie has been seeking Sri Mulyani’s scalp ever since she stopped a government bailout of his publicly traded companies during the October 2008 global financial crisis. The meltdown of the Bakrie companies ended up in the closure of the Indonesian stock market for several days.

Most observers believe Yudhoyono could have stopped the committee process in its tracks back in November, before the House of Representatives launched the special investigation, at a time when he was at the height of his political power as a result of his strong victory in the July national presidential election. He chose to allow it to continue and now it is the defining activity of his second government.

Observers believe it may well set the stage for five years of stasis at a time when the country, a part of the G20 group of top policy-making nations, is also poised to become a member of the so-called BRIC (Brazil, Russia, India, China) bloc of countries.

The decision to name the two may still appear to have more substance than it actually does. Although the probe by the nine political parties involved has concluded, more negotiations must take place to meld the findings into a final report by a House consultatative committee before being presented to a vote of the entire body on March 2. If the House itself were to endorse charges of illegality, Boediono could be impeached and both officials could become the subject an investigation by the notoriously corrupt Indonesian National Police.

A rough vote count at this stage is not good news. With five parties "naming names" over the bailout — including the opposition Indonesian Democratic Party of Struggle (PDI-P — and four remaining loyal to the president, Boediono and Sri Mulyani could only count, today, on 260 votes in their favor out of the 560 lawmakers in the House.

Observers are quick to point out that the House committee has no law enforcement power and any legal action would have to be initiated by the police. Now several things could happen:

  • The report is voted down because the parties have had their say and now they can change their stance to please the president. Faces are saved all around and life goes back to normal.

  • The report is approved and the House begins proceedings to impeach Boediono and the police are asked to arrest Sri Mulyani. This would spell the effective end of reform in the current government.

  • Boediono and Sri Mulyani quit. Bakrie and Hatta Rajasa, the head of Yudhoyono’s finance team, have both been rumored to want the vice presidency as a prelude to succeeding Yudhoyono when his term ends in 2013. This would also likely end the reform agenda in favor of traditional politicians.

  • The president knocks heads, delivering on a threat by his Democratic Party to reshuffle Golkar and PKS out of the cabinet if they don’t shut up. Everybody can still back away.

But no matter what happens, Yudhoyono has been badly weakened. He appears indecisive, unable to control his cabinet and far less the reformer than he claimed to be his second term started. His government has been nearly paralyzed by the probe of Bank Century, which was looted by crooked owners, some of whom are now in jail on fraud charges while others are in hiding abroad.

In reality, of course, there has been no meaningful investigation. The entire House proceeding has been a political tug of war as Golkar and several other parties nominally allied with Yudhoyono sought to get the finance minister and the vice president to walk the plank.

A veiled threat that Bakrie’s far-ranging companies, which are dependent on government contracts and constant financial deals subject to regulatory scrutiny, apparently wasn’t strong enough to deter his ambition to get rid of the two. The tycoon was warned at least indirectly that he could easily find his financial transactions delayed by financial regulators, sources say.

He is already facing several tax cases that the president has said must be settled. Sri Mulyani oversees tax collections and it is widely believed that her aggressive approach to tax policy is behind Bakrie’s intense desire to get her out of the government.

A number of old-line business tycoons also seem to have been quietly supporting Bakrie’s bid to get Sri Mulyani out of the way. “She has a lot of enemies,” said a local observer “They want her gone.”

If she and/or Boediono are ultimately forced out, foreign investors who regard them as leaders in the effort to modernize business practices and governance are liable to turn sour on the country. JP Morgan Asset Management's Hong Kong office has already been quoted by Reuters as saying that it could sell its Indonesian shares in the short term due to political tensions.

“Indonesia is a long-term domestic growth story, but we may take profits in the short term as increasing political noises can potentially delay projects,” vice-president of investment services, Ms Grace Tam, was quoted as saying.

Whatever happens, now that the negotiations over the final document are on in earnest, Bakrie is likely to get his pound of flesh, one way or another.