Major Indonesian banking scandal threatens re-election of president

A murky banking scandal in Indonesia has hurt confidence in the country's financial system, devalued the currency, punished the…

A murky banking scandal in Indonesia has hurt confidence in the country's financial system, devalued the currency, punished the stock market, put a question mark over continued World Bank and IMF aid, and undermined the prospects of President B J Habibie staying in office when a new president is elected in November.

The scandal also threatens many senior political and financial figures in Jakarta and has prompted observers to conclude that the country's leadership has failed to break with the cronyism which marked the rule of former President Suharto.

The affair centres on a shady transaction in June involving Bank Bali, a major commercial bank in Jakarta formerly owned by Chinese businessman Rudy Ramli which has since been taken over by the government. The bank, it was discovered, had recovered a massive sum of money in loans but had then paid out more than half to a collection agency. The agency is run by a top fund-raising official of Golkar, the unpopular political party which sustained Mr Suharto in power and which has nominated Mr Habibie as president.

Golkar at the time needed a big injection of cash to woo (i.e. bribe) voters in the country's first democratic election in June. Despite its best efforts, the party took less than a quarter of the votes cast, but this was enough to give Mr Habibie a fighting chance of getting elected president by the new parliament with the help of smaller parties.

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Mr Ramli was apparently the fall guy in the affair. At a time when he was fretting that he would not recover three trillion rupiah (€382 million) lent by Bank Bali to three failed banks, he was apparently approached by a saviour in the shape of the Golkar vice-treasurer, Mr Setya Novanto, head of the collection company and a key fund-raiser for Habibie's re-election committee. The Golkar official somehow knew all the details of the bank's problems and offered Mr Ramli an extraordinary deal.

His company would collect 904 billion rupiah of the outstanding money from the Indonesian Bank Restructuring Agency (IBRA), which had taken over the failed banks' affairs. In return Bank Bali would give him a 60 per cent commission amounting to 546 billion rupiah. Otherwise no money might be recovered at all. After much toing and froing among bank officials and a host of political figures, the deal went ahead on June 1st. The 60 per cent fee was duly lodged with the collection company on June 3rd.

The question now being asked in Jakarta is - who gave the instructions for this operation and who was involved at the top? Those named have denied any wrongdoing. An influential independent reform body, Indonesian Corruption Watch, claims that it has evidence the huge commission fee ended up with the Golkar election team. Mr Habibie has forbidden any inquiry into the role of Mr Novanto, who is also a member of parliament, but the scandal seems inexorably to be closing in on Merdeka Palace, the presidential residence. A diary of events allegedly written by Mr Ramli gives an account of a meeting with the President's brother, Timmy Habibie, on June 29th, at which the deal was discussed. The former Bank Bali owner has not confirmed this but said the affair is worse than Watergate.

Mr Habibie's aides say he has not benefited from the money but admit he is surrounded by crooks. "The President cannot do much, even when he is so clean and honest, because so many people around him are not clean," acknowledged his spokesperson, Ms Dewi Fortuna Anwar, on Wednesday. "Sometimes people transfer money without his knowledge - there is none." All this has happened at a time when students are preparing new demonstrations against the slow pace of reform and Mr Habibie seems critically damaged in political terms. The prospect of his election as president is now receding as political opponents and Golkar reformers voice their outrage at the scandal, and opposition leader Mr Megawati Sukharnoputri is suddenly looking the much stronger candidate.

Public anger has also been provoked by the very serious threat the affair poses to Indonesia's shaky economy, which had been recovering from the Asian financial meltdown. The International Monetary Fund's Asia-Pacific director, Mr Hubert Neiss, said on Wednesday that a speedy resolution of the bank scandal was extremely important to the $45 billion (€42.81 billion) IMF-supervised economic reform programme. "An unsatisfactory resolution would be a disaster scenario," Mr Neiss said. The World Bank has also warned of the consequences of a cover-up. "It will be very difficult for us to provide budget support for Indonesia if the case is not satisfactorily resolved," said the head of the World Bank's Jakarta office, Mr Mark Baird.

As police and government officials met to discuss the issue on Wednesday, the Indonesian central bank was given the go-ahead to bring in the auditing firm of PricewaterhouseCoopers to check its books, saying that the Bank Bali issue was in the process of being settled. An investigation of Indonesia's commercial banks, several of them now in the hands of the government, could however throw up more scandals, financial analysts say. Bank Bali faces other pitfalls of its own. Trading in its shares has been suspended since August 12th and the Capital Market Supervisory Agency is looking into possible insider trading. Mr Ramli's company now holds only an 18 per cent stake in Bank Bali which has been managed by Standard Chartered Plc since the government took it over in July and began selling its shares to repay debts. Deutsche Boerse in Germany has accumulated 39.27 per cent of the share holdings and the Indonesian government has asked Germany's securities watchdog to find out who is behind the purchase.