Is the Indonesian economic recovery for real?<\/p>\n
By Eddy Soeparno<\/p>\n
JAKARTA (JP): Recent economic indicators suggest that the
\nIndonesian economy is on its way to recovery. Inflation seems to
\nbe under control, therefore allowing interest rates to soften,
\nwhile consumer goods (especially basic needs or "Sembako") have
\ngradually come down making them more affordable to the public.<\/p>\n
The picture gets even better: the rupiah has strengthened by
\n40 percent over the past two to three months, activities in the
\nstock market have picked up and exporters previously being denied
\nopening trade facilities by their bankers, have now slowly picked
\nup their pace of business once again.<\/p>\n
However, underneath the surface lies a bleak picture, notably
\non the economic front (as the political outlook would best fall
\nunder the "grim" category): the various types of foreign capital,
\nbe they in the form of foreign direct investments, bank loans or
\nportfolio investments have all but returned to the country.<\/p>\n
And looking back at historical data, Indonesia's economic
\nmiracle was supported by three primary pillars, namely revenue
\nfrom the export of natural resources (mainly oil and forestry
\nproducts), foreign direct investments and offshore borrowings.<\/p>\n
And in the absence of the latter two, it is widely anticipated
\nthat the economic recovery will actually come much later rather
\nthan sooner.<\/p>\n
Although this part of Asia has among the highest savings rates
\nin the world, nevertheless the modernization and
\nindustrialization of Indonesia over the past three decades
\nrequired capital beyond that available in bank deposits or public
\nsavings accounts, thus creating the need for foreign funding.<\/p>\n
With today's oil prices at all time lows and forestry products
\nin neck-and-neck competition with other woodbased producing
\ncountries, an economic comeback minus offshore capital
\npractically puts Indonesia off the road to stability, let alone
\nrecovery.<\/p>\n
Even the recent strength in the rupiah does not reflect the
\nactual fundamentals of the currency, as it is clearly supported
\nthrough indirect interventions, namely by progressively
\nconverting IMF-sourced funds into rupiah to carry out various
\nsocial safety net programs.<\/p>\n
Despite continuous denials of such actions by the central
\nbank, however in a thin market where the rupiah is currently
\ntraded, even bystanders can notice the active parties involved in
\nbuying up large rupiah positions. And they sure are not
\nspeculators or hedge fund managers.<\/p>\n
Also misunderstood is the recent pick-up in activities on the
\nJakarta stock market, suggesting that foreign capital has made
\nits way back into the country. This perception, unfortunately, is
\nnot entirely correct. In the light of an extremely weak rupiah,
\nfollowed by a number of bankruptcies as well as corporate
\nliquidation, foreign funds that have actually reappeared in
\nIndonesia are only those related to buying distressed assets
\ncurrently offered at fire sale prices.<\/p>\n
Looking at present economic data, the net foreign direct
\ninvestment number has dropped significantly, though logically.
\nTherefore, recent activities in the stock market are more
\n"bargain hunting" driven, rather than investment driven.<\/p>\n
And since hardly any of the capital inflows were dedicated to
\nproduction increases in the real sector, it could be safely
\nassumed that most of this incoming capital is allocated for the
\nacquisition of assets, mostly owned by recession-plagued
\ncorporations and banks.<\/p>\n
Besides the issues of capital inflow and misperceived
\nstability, the fate of an economic recovery also lies in the
\nsettlement of the foreign debt problem as well as recapitalizing
\nthe banking sector.<\/p>\n
The former has been addressed recently by both the IMF and the
\ngovernment in an attempt to relieve the corporate sector from
\nimmediate debt obligations. Nonetheless, much of the foreign debt
\nis still in renegotiation with their lenders and therefore remain
\nunsettled. That is when the government decided to actively
\nfacilitate discussions between borrowers and their lenders.<\/p>\n
However, government efforts to mediate negotiations could only
\nprove effective provided active mediators are involved in the
\ndiscussions. Furnishing negotiation groundwork and facilitation
\nefforts are simply not enough, unless active and experienced
\nfacilitators are in the picture. As such, professional expertise
\nand not merely guidelines are urgently required in the mediation
\nefforts to bring banks and their debtors closer to reaching a
\nsolution.<\/p>\n
And in going about their task of revamping the crippled
\nbanking sector, the government should clearly state the actual
\nconditions of each troubled bank prior to injecting public money
\ninto them.<\/p>\n
Just as a reminder, it is taxpayers money used to recapitalize
\nthe banking sector, therefore taxpayers have every right to know
\nwho their money will end up with.<\/p>\n
The government should also realize that their hesitation in
\nclosing up more banks, including some clearly insolvent state
\nbanks today, may cost the public more money in the future, should
\nthese banks be allowed to survive using a life support system in
\nthe form of liquidity facilities from the central bank.<\/p>\n
As such, the government does not need to be shy in
\nacknowledging that the concept of "too big to fail" should in
\nfact be replaced by a simply "too much to save" concept.<\/p>\n
Finally, to answer the question of whether Indonesia is in the
\nmidst of an economic recovery, one must be given the opportunity
\nto analyze the entire economic picture and not merely a handful
\nof indicators as normally presented to the public.<\/p>\n
Although a stronger rupiah and lower interest rates put
\nIndonesia in an operating environment to start its economic
\nrecovery, however to complete such a recovery, investors (both
\nforeign and local) are urged to repatriate capital back into the
\ncountry in the form of productive investments.<\/p>\n
On the other hand, corporate borrowings need to be
\nrestructured and the intermediary function of the banking sector
\nhas to be restored. As such, a strong rupiah and lower interest
\nrates are simply vague indicators to confirm a reversal of this
\nmiserable economic trend.<\/p>\n
Banks have to start lending again, investors have to start
\nbuilding up factories and creating new jobs, while unpaid
\nborrowings have to be restructured. Until this is achieved,
\nIndonesia will always remain on the brink of economic recovery
\nbut never actually recover.<\/p>\n
And there is enough evidence out there to tell us where we
\nwill be in the near future if this does not materialize very
\nsoon.<\/p>\n
The writer is a director at a foreign bank in Jakarta. The
\narticle represents his personal views.<\/p>",
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