Restoring investor confidence<\/p>\n
The following is based on a presentation by economist and
\nchairman of the Indonesia Forum Foundation Mohammad Sadli at the
\nISEAS Forum on regional strategic and political developments. The
\nevent held by the Institute of Southeast Asian Studies took place
\nin Singapore on Aug. 29.<\/p>\n
SINGAPORE: The economic recovery in Indonesia started during
\nthe second half of 1999, if recovery means that the economy is no
\nlonger contracting. During the height of the crisis in 1998, the
\neconomy contracted by almost 14 percent, the most severe in East
\nand Southeast Asia.<\/p>\n
The recovery was started by a resumption of consumption;
\nconsumers started to spend from current income and from past
\nsavings.<\/p>\n
During the first quarter of the year 2000, Dana Reksa Research
\nInstitute, which initiated a Consumer's Confidence Index,
\nreported increasing rates. This index, however, dropped slightly
\nsince April 2000, although still remaining above 50 percent
\n(meaning more than half of the respondents replied positively).
\nIt started to strengthen again in July, but the figure is still
\nless than 60 percent.<\/p>\n
The recovery, started through consumer spending, received
\nsupport from a good export performance. Overall export figures
\nfor 2000 indicate strength, but this is because of very buoyant
\noil prices.<\/p>\n
It may reach US$60 billion, which is a bit higher than the
\npre-crisis level of US$55 billion. Non-oil exports also picked up
\nduring the year, thanks to the weak rupiah.<\/p>\n
Recently there have been signs of resumption of construction.
\nGross domestic product (GDP) figures for the second quarter of
\n2000 indicated positive growth in the construction sector.
\nGrowth in the agriculture sector in the same quarter was
\nnegative, but this is a seasonal phenomenon.<\/p>\n
In spite of this, the quarterly growth figure was 4.1 percent,
\nhence giving promise for a 4 percent GDP growth rate for 2000.
\nThis figure showed up in optimistic predictions, although the
\nworse scenario figure was closer to 1 percent.<\/p>\n
If the economy really picks up after the recent political
\nreshuffle, then perhaps it can enjoy a closer to 5 percent growth
\nrate. For the year 2001 this growth rate will then be better than
\n5 percent. If all this comes true, it forebodes well for
\nIndonesia's future.<\/p>\n
Investments have fallen sharply since the crisis. The present
\neconomic recovery is led by consumption and exports, not as yet
\nby investments.<\/p>\n
Recent statistics issued by the Investment Board, however,
\nindicate that there has been some rebound in foreign investment
\napprovals during the first semester of the year 2000 (655
\nprojects totaling US$2,325.1 million) as compared to the first
\nsemester of 1999 (519 projects, stated at US$1,849.8 million).<\/p>\n
On the domestic investments side, however, there was a decline
\nin value but not in the number of projects. Total investments for
\nthe first semester of 2000 lay in 146 projects, totaling Rp
\n12,914.8 billion, while during the first semester of 1999 there
\nwere approvals for 106 projects with total stated investments of
\nRp 19,255.6 billion.<\/p>\n
Hence in the domestic scene there has been a shift to smaller
\nprojects in all three categories -- new projects, expansions and
\na change of status from foreign to domestic investment -- which
\nis very plausible.<\/p>\n
The major causes of the decline in investments have been: (1)
\ndrying up of bank credits both from inside and outside the
\ncountry, (2) an uncertain political climate, (3) insecurity on
\nthe ground because of lawlessness and the emergence of new and
\nmore aggressive labor unions, (4) policy confusion between
\ncentral government general policies and some sectoral and
\nfunctional ministries (e.g., conflict between new environment
\npolicies and respecting old contracts or investment permissions).<\/p>\n
Looming in the near future are the consequences of devolution
\nof powers to districts and provinces; for instance, which
\nauthorities will have to approve new entries?<\/p>\n
In the short run, improvements of the investment climate can
\nonly come from a change in the makeup of the central government.<\/p>\n
This can instill greater confidence in the market and hence
\nproduce a more stable rate of exchange of the rupiah and less
\nundervaluation.<\/p>\n
Through better policy coordination and greater professional
\ninput in policy making -- such as less intervention from the
\nPresident -- policy consistencies may be improved and ambiguities
\nsuppressed.<\/p>\n
The sorting out of investment policies and administration in
\nconnection with regional decentralization, however, will only be
\nresolved during 2001 at the earliest.<\/p>\n
Lawlessness and lack of security with respect to large
\ninvestments in mining and agribusiness in the regions, however,
\nwill probably be overcome more slowly. The same may be true with
\nrespect to industrial peace because the dust of the new labor
\nrelations law has to settle.<\/p>\n
During the time of uncertainty the companies have mainly to
\nmend their own fences. They have to improve community and
\nindustrial relations through dialog, interactions, recognition of
\nchanging times, and more effective public and social relations.<\/p>\n
In the end they may have to pay more, or endure increased
\ncosts, but Indonesia being still a poor country (hence with cheap
\nlabor) increases in cost of labor, personnel and community
\nrelations may not make Indonesia internationally uncompetitive --
\nexcept perhaps vis-a-vis China.<\/p>\n
The domestic market is still huge and some protection will
\nalways be available. Most foreign investment companies have also,
\nin relative terms, much greater (rupiah) costs for raw materials,
\nimported other inputs, amortization and interest payments, rather
\nthan \"personnel costs\".<\/p>\n
New investments in mining will not be forthcoming in the new
\nfuture. A new mining law is being drafted but the existing draft
\naccommodates perhaps too many demands from the environmental
\nmovement and the demand for \"people's economy\" (such as demands
\nfor partnership with cooperatives, for early divestments).<\/p>\n
Moreover, the role of the central government and the district,
\nor provincial, governments in the approval system is still
\nunclear.<\/p>\n
New investments in large-scale plantations may also not be
\nattractive because of the pressures from local people and the
\npeople's economy movement.<\/p>\n
The production pattern consisting of \"nucleus and plasma\" for
\nplantations may be more promising as the \"plasma\" part consists
\nof small-holders in cooperation with the conventional (nucleus)
\npart controlled by the investor.<\/p>\n
When law and order will effectively return in Indonesia which
\nis still undergoing major political and social transformation, is
\nvery hard to predict.<\/p>\n
The best assessment is that \"things will somehow improve,
\nslowly and bit by bit\". A greater understanding of the still
\nongoing political and social processes can help the investor
\nreduce his risks while maintaining confidence in the future of
\nthe country and its market.<\/p>\n
Investors already in the country for a long time see things
\ndifferently, and have different interests to the new entries.<\/p>\n
Existing foreign investors are usually sticking it out because
\nthey have to protect their sunken investments and the majority
\ncan still cope with the reigning uncertainties without damaging
\ntheir profit-and-loss position irreparably.<\/p>\n
New investors could find bargains in the sale of current
\nassets. The crisis has produced many winners and losers. Some of
\nthe winners can buy out some of the losers, as can be seen today
\nin the banking sector, real estate, hotels, supermarkets, etc.
\nThe economy may end up more in foreign hands, but the alternative
\nis prolonging the slow recovery.<\/p>\n
Indonesia is in the end still part of South and East Asia, a
\nvery dynamic region, which will pull itself up from the deep
\ncrisis.<\/p>\n
The investment behavior in this region has been marked by
\ncontagion and emulation. Hence what is happening, for example, in
\nBangkok and Thailand, will sooner or later repeat itself in
\nJakarta and Indonesia, as long as Indonesia maintains an open
\neconomic system. That was the case in the plunge towards the
\ncrisis and will repeat itself in the climb toward recovery.<\/p>",
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