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American Indonesian

Chamber of Commerce

�for business and understanding�

 

To: AICC Members

From: Wayne Forrest, Executive Director

  

To: All Members and Friends

From: Wayne Forrest, Executive Director

Date: 01/14/02

 

In advance of receiving your printed copy of the next issue of "Outlook/Indonesia", AICC's newsletter, you may view it at our website:   http://www.aiccusa.org/outlookdecember2001/index.htm 

Below is my commentary from the issue:

 On to 2002: Time to Muddle Ahead�

�Commentary

�by Wayne Forrest

 

By most accounts, 2001, was a year to forget in Indonesia and the rest of the world.� The promise of Abdurrahman Wahid's reform Presidency quickly dissipated into a major political power struggle within the elite, echoing� the numerous ethnic, religious and separatist conflicts in Aceh, Maluku, Irian Jaya,� Kalimantan and Sulawesi. Since the National Assembly's (MPR) election of Megawati Soekarnoputri as the nation's 5th President in July 2001, the country appears a bit calmer even though it has struggled with its response to the events of September 11. The initial threat of a resurgent, more militant Islam, has been thwarted for the most part by the opinions of Indonesia's, tolerant and outward oriented, mainstream.�� What can be expected of the coming "palindrome" year ?

 

In 2002, we will still probably read stories pointing out plenty of reasons for Indonesia's demise, or descent into darkness.� But wiser analysis will reveal that somehow the country and its people continue to survive, and although there may be pessimism, its not new. Some of the extremist forces seeming to break it up have been around before and were ultimately sidelined. A "muddle" continues to be an appropriate and even welcome metaphor given the enormous challenges facing Indonesia's fledgling democracy, the lack of adequate capacity in its institutions, and the ambiguities of its Constitution.� Until this capacity can be created (and I include reasonable salary levels for judges, police and military, legislators, teachers and other mid-level bureaucrats) it would be unfair to expect Indonesia to function with the same moral underpinning as more prosperous nations even though the desire is clearly there.�

 

Thus, decisions that on the face may seem to be in Indonesia's best interests (i.e. selling Semen Gresik at a huge profit, effective prosecutions of corrupters or human rights violators, changes to the electoral system and the Constitution) may not get made and this will frustrate friends of Indonesia as well as Indonesians themselves who are disappointed with the pace of reform .� It will be important to refrain from lectures and in any case, actions always speak louder than words. Foreigners need to continue to show sympathy, charity, and understanding while� making constructive suggestions where possible.

 

Indonesia's currency free floating exchange rate is the "chat room" of foreign investors and traders and their reaction to the government's reform effort.. The rupiah was above 10,000 for almost all of 2001 and the nation's budget was based on 7800.� There's obviously a significant political risk proportion to its value.�� The government has the ability to create policies to improve the rupiah's value but has demonstrated only an interest in countering downward pressure.� One still observes officials who comment that a stronger rupiah hurts exports, a debatable notion when so many exports are priced in dollars and have imported components.� Coalition governments don't often get too proactive on currency issues and I suspect we won't see any real improvement in the value of the rupiah in 2002, especially given the incapacity of the banking and corporate sectors to absorb offshore funds as well as policy inconsistency.�

 

Amidst the change of government and the slowdown in the economies of� Indonesia's major trading partners the economy grew modestly, 3.5% in 2001, and 2002 figures are will� be about the same.�� Although the GOI and others will say nice things about these numbers --that they're the best in the region this year-- the economy has essentially been on "autopilot" for some time and no one should honestly take credit for them in my opinion. Not having "strayed" too far into electronics and high tech should not be interpreted as a strength given how much Malaysia and Thailand have benefited from pursuing policies that were attractive to this industry before and will be again when the rebound occurs.� In the words of former Ambassador to the US, Dr. Dorodjatun Kuntjoro-Jakti, now Coordinating Minister for the Economy, "In Indonesia you can almost do nothing and the natural population growth and agricultural production will get you 2-3% growth".� But its clearly not enough for adequate job creation and long term stability.���

 

A string of� asset sales (Salim companies), a few privatizations� at the end of 2001as well as good tax collection and private debt restructuring numbers (Jakarta Initiative) lent some optimism in our opinion. Megawati's government seems to be getting along well with the IMF and they are meeting certain benchmarks.� PT Holdiko, a holding company established by IBRA to sell assets of the Salim Group did quite well in 2001, closing many deals in the fourth quarter. But with over $60 billion of assets to sell and a lackluster performance to date, IBRA ought to build on this successful formula in 2002. In addition, PLN announced� significant agreements with Paiton Energy Corp. (Mission Energy, GE Capital) and Siemens, that appear to have settled a long standing dispute over a power purchase agreement.�� Mission Energy immediately began discussions on building more power plants which could alleviate projected power shortages.� More agreements of this type will help US companies do business in the country in an area of primary strength: infrastructure. Business activities continue in many cases unabated by the national crisis and the issue of whether or not reforms are being implemented.��

 

Amid the bright spots, the overall investment climate, however, is still more negative than positive with negativity driven by perceptions of political instability, regional violence, radical Islam, poor implementation of regional autonomy, and rule of law. Unbalanced media coverage, overplaying the influence of anti-American groups, certainly hasn't helped.� Positives are low asset prices, good exchange rate, fundamentals of natural resources and labor supply and modest consumer demand. Those willing to commit new investment dollars tend to be mining and energy firms with substantial existing operations that need to be enhanced for market reasons. Little investment is going into financial sector, and evidence points to a net outflow in this sector as some financial instruments tendered in the past are now reaching maturity.� Corruption, always a factor, is not interpreted by most companies as a deal breaker or business destabilizer but more as an annoyance. My view is that civilian-military relations is colored by it to the extent that the military presence in business is sizeable and that certain reforms would affect their financial position.� The military has traditionally raised 50-70% of its revenue from off- budget sources including business. Megawati's government has more sympathy for the military than her predecessor and renewed interest on the part of the Bush administration to establish closer ties point to greater stability.�

 

For the most part I am reasonably assured that policy leaders have the market knowledge to respond to international expectations but see weakness in leadership, especially regarding a resurgent and at times self-indulgent Parliament and National Assembly. This should improve in 2002 as most observers believe the annual "dump the President" ritual in the MPR will not reoccur; Megawati's coalition has taken hold and a certain measure of stability will characterize 2002-2003.�� The travel advisories, though recently scaled back, are still operative and do affect the travel of some companies and individuals.� We believe that the US Embassy has been on the whole fair and responsible but given the lack of any physical actions against Americans amid the threats believe that the US ought to scrap the current travel advisory and issue a new one with language more appropriate to what's actually happened. Barring this, I think new US Ambassador to Indonesia, Ralph "Skip" Boyce, who has made an excellent start in improving relations, will seek further modifications to the existing travel language that will benefit tourists and business travelers alike.

 

In sum, I'm hopeful that 2002 will be better than 2001.� It certainly will be just as noisy as last year as Indonesia's newfound democracy allows a counterpoint of voices.� Only time will tell if they will sing the same tune or fall into dissonance.� A muddle again ?� Yes, but a more hopeful one if one can say so.