On 27 July 1996, soldiers, police, and civilians attacked the headquarters of the Indonesian Democratic Party (Partai Demokrasi Indonesia, PDI) in Central Jakarta, which was occupied by supporters of party leader Megawati Sukarnoputri, daughter of former President Sukarno. Megawati had been selected as party leader in general congress in December 1993. Her selection, however, was seen as a threat by the New Order government, which suppressed free speech during its 30 years in power. Popular support of Megawati and the PDI was growing leading up to the 1997 legislative election and threatened the dominance of the ruling Golkar party. The government declared Megawati's appointment invalid and organised a new congress in June 1996, during which a new party leader was selected. The attackers said they were acting on behalf of the rightful party leadership. The incident evolved into two days of rioting in Jakarta that the government blamed on the People's Democratic Party (Partai Rakyat Demokratik, PRD). Violence continued up to the election on 29 May 1997, which was won by Golkar with 74 percent of the votes. The divided PDI received only 3 percent of the votes, while the largely Muslim United Development Party (Partai Persatuan Pembangunan, PPP) received 22 percent.
The Golkar-dominated People's Consultative Assembly elected Suharto to seven consecutive five-year terms in office as President between 1968 and 1998.
The election was marred by widespread cases of vote rigging, causing public outcry especially among supporters of the PPP, which had called on the government to follow a democratic process lest the results be rejected by the public. At this time, Indonesia was experiencing an economic boom with its Gross Domestic Product growing at a rate of 8 percent in 1996, led by the manufacturing sector. Five months after the election, however, it was caught in the Asian Financial Crisis which began when the Thai baht collapsed in July. The rupiah dropped from Rp2,450 to Rp4,000 to the US dollar between July and October, and economic growth slowed to 1.4 percent in the fourth quarter. Unable to stabilise the economy, the government sought assistance from the International Monetary Fund. The rupiah declined further to one-sixth of its original value by January 1998. With rising unemployment and inflated food prices, the public lost confidence in the government's ability to turn the economy around. Violence spread throughout the island of Java, but the government exercised its power in February and imposed a 25-day ban on street protests. Law enforcement officials were given the authority to imprison anyone found participating in political activities in violation of the ban.
Suharto was elected by the People's Consultative Assembly (Majelis Permusyawaratan Rakyat, MPR) to a seventh consecutive five-year term as President in March. Despite calls for economic and political reforms, his controversial Seventh Development Cabinet included his family members and cronies, including protégé B. J. Habibie as Vice-President. Student demonstrations in campuses grew in intensity following these events.