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On to 2002: Time to Muddle Ahead
- Commentary
- by Wayne Forrest
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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.
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