Just as Indonesia's battered economy was beginning to show signs of recovery, its currency has taken a surprising plunge, reviving the specter of last year's currency collapse and illustrating how political uncertainty continues to control the direction of the financial markets.
A corruption scandal at the heart of the country's banking system and fresh violence in the outlying provinces combined today to drive the value of the currency, the rupiah, down to 7,885 to the dollar. That marks a 1.5 percent drop from Wednesday's close and an 11 percent drop for the week.
In June, some government economists were boasting that the country's two-year-old economic crisis might finally be over. After the country's largely peaceful elections that month, the rupiah rallied to 6,550 to the dollar. But hopes for a recovery began to unravel when an excruciatingly slow ballot count raised fears that cheating might mar the country's first free elections in four decades. In addition, it became clear that the victory of reform-minded opposition parties might not translate into the removal of Indonesia's unpopular president, B.J. Habibie. Megawati Sukarnoputri's Indonesian Democratic Party of Struggle won the elections with 34 percent of the vote, but she is not guaranteed the presidency because under Indonesia's complex, indirect system, the president is chosen by a 700-member electoral college.
Then violence escalated in troubled Aceh province, where a military crackdown on separatists has left scores dead, and in Maluku province, where Muslim and Christian merchants have clashed.
Dozens of people have been killed in Maluku this week, prompting the armed forces to send in about 900 troops today to try to quell the unrest. The Reuters news agency reported today that witnesses had accused troops from the elite Kostrad unit of carrying out a massacre Wednesday at a church outside Maluku's provincial capital, Ambon, that left 24 people dead.
Amid those crises, the country's banking sector has been stung by a corruption scandal that businessmen and economic analysts have called the trigger for today's currency plunge. Some $80 million from one of the country's failed banks is alleged to have ended up in the coffers of Habibie's ruling Golkar party.
Bank Bali was reported to have paid around $80 million as a "commission" to a finance company controlled by Golkar's vice treasurer in exchange for helping the bank recoup money lost on interbank loans. But banking experts and opposition politicians have called the payment highly irregular, since outstanding loans from bad banks were already covered by a blanket government guarantee.
Opposition parties said the bank may have been pressured to make the payment, with the money possibly earmarked to help finance Habibie's efforts to retain the presidency. "The Bank Bali scandal is just the tip of the iceberg," said opposition leader Amien Rais, who called for the suspension of the country's top economic officials.
Analysts said the scandal has undermined confidence in the process of bailing out local banks but it has revived the image of Golkar as the corrupt party that ran the country to economic ruin under president Suharto, who resigned under pressure last year.
"Bank Bali was the trigger" to the rupiah's plunge, said Gilbert Wiryadinata, a local property consultant. "The scandal really frightens [people]. . . . If this can happen to this bank, what about the smaller guy? It can happen to anybody."
This reversal in the rupiah's fortunes comes after a spate of good economic news. The stock market had returned to levels comparable to those before the 1997 Asian collapse, thanks to infusions of foreign cash. And figures for July showed inflation had dropped to minus-1.05 percent, marking the fifth consecutive month of deflation following last year's 77 percent inflation.
"The economy is actually coming back much stronger and faster than anticipated," said Arian Ardie, a business consultant with the Columbus Group. "But the financial sector is still a mess. Until that's resolved, there's still a lack of confidence."