Page 1 of 2 Indonesian reform, economy at crossroads
By Bill Guerin
JAKARTA - Indonesia is on the upswing, with strong export and economic growth
combining to drive the Jakarta Stock Exchange Index up by more than 55%,
accounting for the world's third-best stock-market performance in 2006.
That good news was underpinned by surprisingly strong political stability and
improved macroeconomic fundamentals, seemingly flouting the country's recent
reputation as a haven for international terrorists and economic mismanagement.
So can the perennial
sick man of Southeast Asia maintain the positive momentum into 2007?
Consensus forecasts indicate that the Indonesian economy, driven by stronger
private consumption and buoyed by lower interest rates, should grow between
5.5% and 6% this year. Exports in November were the highest ever recorded at
US$8.92 billion, as the country cashed in on high global prices for energy and
natural resources. Full-year exports in 2005 were on course to hit a whopping
$100 billion.
A series of interest-rate cuts, a strengthening of the local currency and a
steady decline in monthly inflation rates helped to pump up the Indonesian
bourse. Those big gains were attended by strong performances of several listed
blue-chip state-owned enterprises, including Bank BRI, Mandiri and Telkom.
Despite dipping nearly 4% on Wednesday's news of new foreign-investment curbs
in Thailand, financial analysts believe the stock market is primed for another
bumper year.
Improving economic fundamentals is a big part of Indonesia's good news story.
Government policymakers have recently reined in galloping inflation, which was
a moderate 6.6% last year, a striking improvement on the runaway 17.1% recorded
in 2005. At the same time, the local currency, the rupiah, strengthened against
the US dollar in line with other regional currencies, appreciating from 9,823
to the dollar last January to 9,034 by year's end.
Aggressive monetary loosening, where the central bank cut its key interest rate
eight times from May to year's end, brought the benchmark rate down from 12.75%
to 9.5% and contributed largely to stock-market optimism. In line with the
improving fundamentals, investment-approval figures last year were also
substantially up.
Recent figures from the Investment Coordinating Board (BKPM) show that
approvals of foreign direct investment rose 18% to $13.9 billion over the same
period in 2005, with approvals from neighboring Malaysia topping the list with
$2.2 billion committed. Likewise, domestic-investment approvals were up almost
300% to Rp157.5 trillion (about $17.37 billion).
Cloudy investment horizon
But thats where the clouds re-enter Indonesia's investment horizon. Actual
realized foreign investment, as opposed to investment approvals, dropped by 46%
year on year, falling from $8.67 billion in 2005 to $4.69 billion last year.
Despite a highly touted new Economic Partnership Agreement with Japan,
Indonesia's main foreign investment source, total Japanese investment from
January to November 2006 dropped dramatically to $430 million, down 61% over
the same period in 2005. Realized investment from China, which is currently on
a global spending spree trying to secure energy resources, was also
surprisingly down by 43% year on year to $114.8 million.
Muhammad Lutfi, head of the BKPM, told local media last month that the dip in
Japanese sentiment was a reflection of investor concerns about the uncertain
legal environment, a prohibitive tax regime, and lack of infrastructure and
quality workers. Central-bank governor Burhanuddin Abdullah recently echoed
that assessment, warning that despite improved macroeconomic indicators, there
were still substantial "structural problems" with the economy, including
bureaucratic hassles, poor infrastructure and low productivity.
Those high-risk perceptions among foreign investors were reinforced in October,
when the government unexpectedly terminated US oil-and-gas giant ExxonMobil's
1995 contract to operate a 222-trillion-cubic-foot block of natural gas in
Natuna in the South China Sea. State-owned oil giant Pertamina had a 24% stake
in the block, while Exxon had maintained a 76% holding.
ExxonMobil said the contract allowed for two more years, and talks about
extending those rights are set to commence this month. Energy Minister Purnomo
Yusgiantoro hinted at the government's position when he told reporters last
week that he wanted to "maximize" Natuna's production and that Pertamina should
have "more share" in the joint venture.
In a similarly arbitrary government move, Vice President Josef Kalla called on
US mining giant Freeport McMoRan Cooper & Gold, by far Indonesia's largest
taxpayer, to triple the amount of revenues it is now contractually obliged to
share with the government, on the odd logic that world prices for ores had
recently jumped.
The slow pace of economic reforms, including delays in passing new tax and
investment laws, continue to dampen the business and investment climate and
undermine the government's ability to create badly needed jobs. Meanwhile,
proposed business-friendly amendments, backed by the government, to the 2003
Labor Law were abandoned because of strong trade-union opposition, which led to
nationwide protests.
Underlying weakness in the banking sector also remains a cause for concern.
Nearly a decade after the 1997-98 Asian financial crisis blew holes through
most Indonesian banks' balance sheets, after rounds and rounds of debt
restructuring, non-performing loans (NPLs) still account for 16% of all credits
outstanding in the
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