Business up on change in Indonesia

By CNN's Alex Frew McMillan and wire reports

JAKARTA, Indonesia -- Business interests cheered the change in Indonesia's political scene on Monday.

Stocks and the Indonesian currency both strengthened on Monday, as Indonesian lawmakers voted to remove President Abdurrahman Wahid from office.

Indonesia's parliament voted Monday to remove Wahid, rejecting a state of emergency declared earlier. They installed Vice President Megawati Sukarnoputri as president.

More than anything, the approval of Megawati as president restores some order to Indonesia after 12 to 18 months of uncertainty.

"The main thing is, psychologically there's a huge relief that this tension looks like it's finally going to be over," said Andre Cita, an independent consultant in Jakarta.

Reforms "a massive failure"

The change at the top will boost consumer confidence, Cita said. A rise in consumer spending would have a big impact in Indonesia, he added, because it is a less export-driven country than neighbors like Singapore.

Wahid's removal also improves the prospect of economic reform. Wahid, though, refuses to accept the vote.

Reforms under Wahid, particularly of the country's large amount of bank debt, have "been a massive failure," said Ray Jovanovich, head of the institutional group for Credit Agricole Asset Management.

The government holds around $50 billion in bank assets, two-thirds of all bank assets. It took over many banks after the Asian financial crisis in 1997.

Overall, Indonesia's public debt is 118 percent of its annual economic output. Megawati is more likely to push ahead with bank restructuring.

She sees the need for tackling the country's massive debt, Jovanovich said. "It's a noose around their neck," he added.

Markets jump at prospect of change

Groups such as the International Monetary Fund have pressed the government to reduce that burden and sell off stakes in its banks.

Progress is unlikely to be fast, though. First and foremost, the removal of Wahid ends months of speculation.

"Without political stability there can be no economic prosperity in Indonesia, that's the bottom line," Jovanovich said.

Wahid refuses to step down. But Indonesian markets jumped at the prospect of a change.

The Jakarta composite index leaped Monday, setting a 10-month high during the day. It closed up 2.0 percent at 470.23, its best close since September 2000.

The Indonesian rupiah also jumped as the market realized Wahid would likely be forced from office.

It climbed more than 10 percent from Friday and set a fourth-month high of 10,100 against the U.S. dollar.

The rupiah see-sawed as high as 11,125 during the day on the instability. But it closed at 10,200, a level it hadn't seen since March.

Rupiah would help battle inflation

A stronger rupiah helps the government with its budget and spending. It will also combat inflation, a growing problem.

The central Bank Indonesia on Monday said inflation would run between 9 and 11 percent in 2001, up from its previous forecast of 6 to 8.5 percent. Outside observers say the rate may be much higher.

Bank Indonesia Governor Sjahril Sabirin said Monday he expects the rupiah to strengthen further, breaking 10,000 to the greenback.

Cita said Megawati taking over will increase Indonesia's chances of restoring relations with the International Monetary Fund.

The IMF froze a vital $400 million loan in December. The group was dissatisfied with the pace of reform under Wahid.

IMF to review reforms in September

The IMF's top representative in Indonesia, John Dodsworth, has said it hopes to resume the loan in August, regardless of the impeachment process.

Megawati taking over may mean a $5 billion program gets back on track. The IMF has drafted a schedule for reforms and says it will review progress in September.

"With this [impeachment] out of the way, it creates a better atmosphere," Cita said. "They can have some success with their negotiations with the IMF."

In the long run, a settled political scene may lure companies back to Indonesia. ExxonMobil froze its oil operations in the province of Aceh in March, fearing for the security of its workers.

The company has started to produce a small amount of gas. Improved law and order might tempt companies like Exxon to return, experts said.

Wahid's removal will do little to draw overseas investment to Indonesia's stock market. The country accounts for less than 1 percent of Asian indexes, with most overseas money invested in a few big companies

That's unlikely to change with Wahid pushed out. But the move would inject some much-needed certainty that could set Indonesia on a recovery path.

"Before the country starts running ahead with reforms, we're looking for stability," Cita said.

Reuters contributed to this report.