| |
Indonesia's economy: Everything but
money
By Bill Guerin
JAKARTA
- Indonesia's macro indicators are probably better today
than they have been at least since the Asian financial
crisis of 1997-98 wrecked the economy. So, despite
President Megawati Sukarnoputri's March declaration of
2003 as the Year of Investment, why aren't foreign
direct investors beating a path to Southeast Asia's
biggest economy, the fourth-largest country in the world
by population?
A rock-steady rupiah,
macroeconomic stability, substantial foreign-exchange
gains, manageable inflation, reduced external debts and
a shrinking budget deficit have not been enough to turn
the tide. Ingrained perceptions of country risk or, more
accurately, risks continue to haunt an administration
facing elections next year.
Amid positive news,
including a sovereign ratings upgrade, a planned bank
sale and the latest International Monetary Fund (IMF)
loan disbursement, the Jakarta Composite Index (JCI)
extended gains last week to end at its highest in more
than three-and-a-half years.
The government
announced that it would offer 45 percent, not 30
percent, in its forthcoming public offering for shares
of the country's fourth-largest bank, Bank Rakyat
Indonesia (BRI).
Last week the IMF granted a
US$493 million loan payment, the second-last payment
under the $5.2 billion facility.
Key indicators
in the 2003 budget have been surpassed. For example, the
budget set an inflation target of 9 percent for this
year, against 10 percent last year. But after peaking at
more than 15 percent in early 2002, inflation is now
running at an annual rate of 6.2 percent, the lowest in
the past three years, and is predicted to fall to about
5 percent by year-end.
The rupiah, one of the
best-performing currencies in the region this year, now
trades at about 8,380 to the dollar, against an average
8,900 assumed in the budget despite significant declines
in key policy interest rates and official exchange-rate
intervention by the central bank. Interest rates are now
reaching historic lows as the lower-than-expected
inflation allowed Bank Indonesia, the central bank, to
cut its benchmark one-month SBI interest rate to 8.53
percent. This year's budget forecast a rate of 13
percent.
So what's the trouble? In a word - or
several - fiscal and corporate debt, unemployment,
security and corruption, and a lack of government will
to do anything about them.
A third of
Indonesia's budget goes for debt service. The country's
massive deficit, projected for next year at 77 percent
of gross domestic product (GDP), is a fundamental
problem dating back decades to the time when Megawati's
father Sukarno was in power. It has left a legacy of
inflation and robbed the country of development funds
because of the necessity of debt payment.
The
total national debt stands at almost $130 billion, with
more than $70 billion owed by the government, and the
rest by local companies. Successfully restructuring
these billions of dollars of foreign debt without an IMF
program will incur a significantly higher cost. Interest
rates will be less favorable than could have been
negotiated under the IMF umbrella.
The central
bank has said total debt maturing this year alone will
reach $18.5 billion, although some companies are still
trying to roll over the maturities. Debt repayments of
$5.16 billion in 2004 will exert pressure on the balance
of payments. Interest charges for this debt badly impact
on the country's finances. This interest cost wastes
large portions of the taxpayer's money without producing
a single thing: no goods, no jobs, and no infrastructure
- it is money thrown away.
The budget deficit
last year was a mere 1.6 percent of GDP, but the deficit
policy itself is often criticized.
When Sukarno
was in power, excessive government spending led to
hyperinflation of more than 700 percent annually. During
Suharto's rule a balanced budget was government policy
and the development portion was upped every year to
support growth, though revenues from the fiscal sector
were constantly insufficient to finance this need.
The deficit had to be covered, mainly by
borrowing from donor countries in the Consultative Group
on Indonesia, and the borrowing only sustained the
relentless cycle of debt. The economy did not have
enough capacity to generate sufficient output and
revenue to service these debts.
The same is
happening now. The government no longer has the money to
support infrastructure development, so private-sector
funds are increasingly vital. Though the financial
sector and the capital market are recovering, most of
what new money there is coming onshore is not direct
investment (FDI), badly needed to stimulate the
expansion of an economy that, though on a path of modest
growth, has achieved an annual equivalent of only 3.8
percent so far this year. Indonesia was the only one of
the 10 Association of Southeast Asian Nations (ASEAN)
member states to record negative growth in FDI inflow in
2002, while Malaysia, by comparison, achieved a record
478 percent jump in FDI inflow.
Indonesia's FDI
inflows are thus not sufficient to deal with the massive
unemployment problem. With some 9.1 million out of work
and an annual influx of 2.5 million new entrants to the
labor market, analysts say annual growth of at least 6
percent is needed. GDP growth of 5.4 percent is the
average forecast for next year, and this will still
depend heavily on domestic consumption, as has been the
case since 2000. Domestic consumption contributes about
75 percent and investment 15 percent to the country's
GDP, according to the Central Statistics Agency (BPS).
While the attractions for foreign investors are
an enormous labor force, still at the cheapest rates in
the region, and an abundance of natural resources rich
for exploitation, investors are frightened off by labor
disputes that can result in the closure of a plant and
by the ease with which they can lose court actions.
Part of that results from a controversial new
labor law passed in June that not only managed to
alienate most trade unions but also, more damagingly,
was widely seen as one of the most anti-business acts in
the region.
A warning came from Bank Indonesia
last weekend via its latest report, which said that the
consumer confidence index - which measures the public's
perspective on the economy - declined in August to 76.3
from 81.8 the month before. The rising pessimism
reflects people's declining confidence in the prospect
of family income, the central bank said.
According to a recently released White Paper,
the government will seek to reform the industrial and
trade sectors and will attempt to improve the judiciary
and law enforcement in cases involving corruption.
As regards corruption, the Berlin-based
Transparency International has once again ranked
Indonesia as one of the world's most corrupt nations and
alongside poorer African countries in terms of
investment climate. It cites widespread graft in the
public sector and judicial system when ranking Indonesia
almost at the bottom of a list of 103 corrupt countries,
only slightly better than Myanmar, Angola, Cameroon,
Paraguay, Nigeria and Haiti.
Indonesia's score
of 1.9 out of 10 prompted Teten Masduki, coordinator of
the Indonesia Corruption Watch (ICW), to point out that
all this was hardly surprising as " widespread
corruption can be seen at every level". He said the
country "desperately needs a leader who has a solid
track record and high integrity".
The economic
package outlined in the White Paper, a blueprint for a
post-IMF future, sets out a series of time-defined
targets for specific economic actions to be undertaken
by the government. The targets under the IMF programs
were quantifiable and easily measurable, but analysts
say the lack of concrete targets to measure the success
of the proposed actions casts some doubt that Indonesia
will maintain the fiscal discipline needed to continue
its recovery and improve its credit rating. They cite
lack of clarity in the outlining of policies to boost
investment, exports and employment.
Early signs
are hardly promising. The government simply abandoned
programmed subsidy cuts agreed with the IMF, in order to
halt further fuel and electricity price hikes this year
as election campaigns get under way.
Oil prices
on the international market increased to an average
level of $26.50 per barrel, compared with the budget
assumption of $22 per barrel. This means higher spending
on fuel subsidies, which, the government says, could
increase to Rp25.6 trillion ($3.04 billion). Even with
windfall profits from higher oil prices on the
international market it still leaves a further deficit
of Rp5.5 trillion.
Investors were showing
serious interest in the mining, oil and gas, banking and
telecommunications sectors before the bombing of the
Marriott Hotel on August 5. Though the impact on the
economy has been minimal, the effect on the investment
climate is still uncertain.
Security problems,
problems with legal reform, bureaucracy, corruption,
political inaction, labor issues, and so on feed the
negative perceptions of Indonesia in investors' eyes.
Warnings that, as Al-Qaeda plans new suicide hijackings
and bombings in the United States and abroad, Indonesia
is a prime target because of its relatively lax security
and the presence of radical Islamic groups badly affect
sentiment.
However, the 2004 election,
economists predict, will be great for the economy. An
expected rise in money supply and likely high spending
in the state budget during the early post-IMF period are
expected to have a positive effect on the economy. A
burst of consumption as political parties spend big
money on their campaigns should boost consumer spending
dramatically, as happened in the last election year. It
was the single factor that kick-started the economy in
1999. Continued lowering of interest rates should also
fuel private consumption.
Some analysts suggest
that in the run-up to the election, investment inflows
will come mainly from privatization of the remaining
state banks and other state assets. Certainly the
Indonesian Bank Restructuring Agency (IBRA) has made
good progress in restructuring and selling assets the
government took over in the wake of the regional
financial crisis. But IBRA is winding down to the end of
its tenure, and evidence suggests that the remaining
weak state banks will eventually get a government
bailout, come what may, adding more costs to the
taxpayer.
Standard & Poor's (S&P) last
week upgraded Indonesia's long-term foreign and local
currency ratings slightly, reflecting fiscal performance
but warned, "The ratings on Indonesia are constrained by
political uncertainty." Nothing new there, though
perhaps a tad unfair given that the Abdurrahman Wahid
administration that preceded this one had been noted for
frequent cabinet shuffles and slammed for lack of
consistent policies.
The ratings boost followed
a government announcement that it is planning to issue
global bonds next year, the first since the crisis, to
help finance the budget deficit, estimated to reach
Rp24.9 trillion, or some 1.2 percent of GDP.
Coordinating Minister for Economic Affairs, Dorodjatun
Kuntjoro Jakti, however, conceded that the new debt
rating, five notches below investment grade, had yet to
reach a level that would encourage significant
investment,
Investment Coordinating Board (BKPM)
chairman Theo Toemion will propose a new investment law
to the House of Representatives in December that would
allow foreign investors to put their money in almost all
sectors of the economy, apart from the defense sector,
small and medium-sized businesses, and sectors related
to religion. These sectors will be all that remains of
the once-expansive negative list of areas forbidden to
foreign investors.
Toemion said at the ASEAN
Business and Investment Summit in Bali last week that at
as of October investment in the country had been $10
billion this year, of which $5 billion was foreign
investment.
"We have concluded that short-term
investment will be dangerous and without added value.
But in FDI, they [investors] bring in the capital and
build the factories so that they will not immediately
flee when a crisis occurs," Theo said.
That, of
course, is the point. Divestment of state-owned
enterprises and restructuring of IBRA assets by new
investors should result in a flood of new money into
Indonesia, a boost in job creation and an improvement of
corporate governance. Encouraging quality investors back
in would also kick-start moribund industries and revive
the industrial sector, as well as bringing badly needed
management skills to protect their investments.
Some 576 new projects and 181 expansion projects
worth $5.02 billion were approved, an increase of 23.4
percent from $4.07 billion over the same period last
year. However, the reality behind these figures is that
many of the projects were status changes from domestic
investments to foreign investments (thus largely
formalizing capital investment already approved).
(Copyright 2003 Asia Times Online Co, Ltd. All
rights reserved. Please contact content@atimes.com for
information on our sales and syndication policies.)
|
| |
|
|
 |
|
