Indonesia as contrary
indicator By Sara Schonhardt
JAKARTA - With panic spreading through
United States and European markets, Southeast
Asia's largest economy appears poised to ride out
the shockwaves. As Asia's more export-dependent
economies brace for the impact of a possible
double-dip global recession, Indonesia's domestic
demand-driven growth is expected to sustain its
momentum.
That is a stark contrast to the
country's financial position 13 years ago, when
the Asian financial crisis demolished Indonesia's
economy, drained the national coffers and spoiled
its reputation among investors. It has now
leveraged into high global commodity prices and
ever-rising local consumption that together
account for around 70% of gross domestic product
(GDP).
"Indonesia is really a domestic
markets story and a commodities story," said Fawzi
Ichsan, an economist at Standard Chartered
Bank. He notes that robust
domestic markets helped to cushion Indonesia
against the global economic crisis in 2008 that
dramatically affected many of its regional
neighbors, including Singapore and Thailand.
Many Asian markets have been hit by the
global free fall caused after Standard &
Poor's downgraded the US's sovereign credit rating
to AA+ from its top-tier AAA due to US
politicians' inability to manage the country's
huge fiscal deficit.
Even Jakarta's
Composite, one of Asia's best-performing stock
markets this year, was down by close to 2% on
Monday. But analysts here say the US crisis should
have little impact on an economy that has, to some
surprise, bucked the negative trends elsewhere.
"The impact is immediately being felt in
financial markets, but it is not
Indonesia-specific," said Ichsan. "In the long
run, the US is experiencing a ratings downgrade,
while Indonesia is seeing upgrades."
Indeed, the big three ratings agencies -
S&P, Moody's and Fitch Ratings - have all
upgraded Indonesia's sovereign credit rating to
BB+ or its equivalent and analysts expect the
country to achieve investment-grade status within
the year.
Indonesia's GDP rose by 6.5% in
the second quarter of this year on the back of
high commodity prices, strong consumer demand and
rising investment. As regional heavyweights China
and India struggle with persistently high
inflation, Indonesia has seen previous
inflationary pressures ease. Economists predict
that the central bank will hold the benchmark
interest rate at 6.75% for a sixth consecutive
month.
One reason for Indonesia's
comparatively lower inflation stems from a
government decision to increase budget allocations
for fuel subsides, a policy the World Bank and
International Monetary Fund have criticized.
Jakarta has also allowed in more imports of vital
food supplies, such as rice, to meet production
shortfalls. That could prove particularly prudent
during the Islamic fasting month of Ramadan, when
demand and prices rise as families prepare
elaborate fast-breaking meals.
High yields
on government treasuries have also brought more
money into the bond market. Ten-year Indonesian
bonds currently yield at 6.8%, carrying a higher
risk but significantly higher potential returns
than 10-year US government bonds, which carry a
rate of around 2.6%.
With government debt
comprising less than 30% of Indonesia's GDP,
investment levels are up near record highs.
Foreign direct investment in the second quarter
rose 21% over the same period last year. Those
funds, analysts say, will serve as a cushion to
short-term portfolio capital flows - or so-called
hot money - that are usually the first to flee
during times of crisis.
In the domestic
market, meanwhile, the property,
telecommunications and automotive sectors all
booked double-digit profit growth in the second
quarter compared to last year, while manufacturing
rose to its highest level since the 2008 economic
downturn.
Economists say there is the
potential for some instability caused by legal
uncertainties over land use rights and contract
sanctity, as well as rampant corruption and
infrastructure failings seen in a lack of toll
roads, ports and power plants.
For now,
however, investors drawn by the high potential
returns and stable inflation environment appear
willing to navigate those risks. But some
financial analysts worry that a fall in global
commodity prices or unforeseen political
instability could yet spark a reversal.
Indeed, the upbeat forecasts do not
reflect ongoing problems caused by a weak
government, including endemic corruption,
political infighting and peripheral sectarian
conflicts.
Faint cracks Recent
violence in remote Papua, where a low-level
separatist movement has been brewing for decades,
strikes at mining companies by workers demanding
higher pay and a growing number of scandals that
have rocked the Democrat Party led by President
Susilo Bambang Yudhoyono are all risk factors.
On Tuesday, Indonesian officials confirmed
that Interpol had captured fugitive lawmaker
Muhammad Nazaruddin, who escaped the country on
May 23 one day before he was scheduled to appear
before court on corruption charges. The former
Democrat Party treasurer had eluded arrest and
launched accusations from an undisclosed hideout
that fellow party members, including chairman Anas
Urbaningrum, had accepted millions of dollars in
influence money.
Nazaruddin also accused
the respected Corruption Eradication Commission,
which boasts a 100% conviction rate, of unethical
behavior by colluding with Democrats to shield
high-ranking officials from graft investigations.
A poll released on Monday by the independent
Indonesian Survey Circle revealed that trust in
the anti-graft body had hit an all-time low while
the agency's deputy chairman Mochammad Jasin told
journalists recently that corruption in Indonesia
was at its worst.
Whether these
accusations and revelations will cause enough
political turbulence to derail the economy and
foreign investor confidence, for now, seems
doubtful. "It's like airing your dirty laundry,"
said Yohanes Sulaiman, a political consultant and
lecturer at Indonesia's National Defense
University. "Maybe it's embarrassing to some, but
it won't cause problems on a wide scale."
However, some argue Nazaruddin's case has
again revealed the lack of control Yudhoyono has
over his administration and political party.
Sulaiman says Nazaruddin is merely a loose cannon
who has caught the government off guard and that
investors who know the country are prepared to
roll with such risks.
"As an investor you
already know there are bribes to pay, commissions
to pay, so it's really just business as usual," he
said. "You have to have connections, and you
factor this into your analysis when you invest in
Indonesia."
While Indonesia's political
wheeling and dealing may not register much
investor attention, other domestic conflicts are
drawing international scrutiny. Global
human-rights groups have called on Yudhoyono to
stem the recent political violence in Papua that
has killed 22 people.
They have also
condemned the light sentences given to those who
killed three members of the Ahmadiyah minority
sect last February. In late July, a court
sentenced 12 religious hardliners to no more than
six months in jail for leading a stick-wielding
and stone-throwing mob attack against the sect,
which they considered heretical to Islamic
beliefs. None of the suspects was found guilty of
murder.
The Foreign Ministry defended the
verdicts last week when it told reporters that
people should not "oversimplify" where Indonesia
stands on religious tolerance based on just one
case. But as such cases add up, questions will
rise about the quality of Indonesia's governance
and how poor oversight could eventually impact on
its fast and impressive growth.
Sara
Schonhardt is a freelance writer based in
Jakarta, Indonesia. She has lived and worked in
Southeast Asia for six years and has a master's
degree in international affairs from Columbia
University.
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