Analysts pessimistic about RI recovery

Analysts pessimistic about RI recovery

HONG KONG (Reuters): Indonesia's latest cabinet reshuffle has dashed hopes of any short-term recovery in asset prices, adding fresh political risks for investors considering a return to the country's markets.

Among analysts and commentators there was a widespread sense of opportunity lost on Thursday, although most observers could see both good and bad in President Abdurrahman Wahid's new government line up.

However, overall it was a thumbs down.

"I think it represents a credit negative development in terms of Indonesia's risk premium," said John Woods, head of research at HSBC Markets.

There had been widespread hopes that President Wahid's new cabinet line up, following on the heels of his successful handling in August of a meeting by the country's top legislative body, would signal a renewed effort to fix the economy and a rise in asset prices.

On Wednesday Abdurrahman, often referred to by his nickname, Gus Dur, named a retired general, Susilo Bambang Yudhoyono, as chief political minister and an economist, Rizal Ramli, as top economics minister -- two new powerful positions in the government.

He appointed a banker, Prijadi Praptosuhardjo, as finance minister and re-appointed the widely respected Marzuki Darusman to the sensitive post of attorney-general. Alwi Shihab kept his post as foreign minister.

But almost immediately analysts saw flaws in the changes.

One key drawback in the new line up was that the new appointees appeared to be chosen for a closeness to the president and not necessarily as the best people for the job.

"The choice of finance minister was very disappointing," said Simon Flint, regional currency strategist at Bank of America in Singapore.

Analysts are nervous about the apparent sidelining of Indonesia's largest political party, the PDI Perjuangan, and the clear lack of endorsement by PDI Perjuangan's leader and Indonesian vice president Megawati Soekarnoputri for the new cabinet.

"From a political perspective it looks as if this government has a limited shelf life," said HSBC's Woods.

"I'm not sure the opposition will sit by and allow Wahid to dominate," he said.

The sidelining of Indonesia's top political parties in the new cabinet could bring with it serious legislative problems.

"The concern is that without representation of the two major parties in parliament in the Wahid cabinet, the president is likely to face renewed political tensions and delays in passing important legislation," said Scott Wilson, sovereign debt analyst at UBS Warburg Asia.

But the good news was that the new Cabinet clearly owes its allegiance to President Abdurrahman, rather than their respective political parties.

"The appointees are either relatively apolitical or are associates of Gus Dur," said Bank of America's Flint.

The new senior ministers, Susilo and Rizal, are also seen as able to provide strong leadership to the new cabinet.

"I don't regard it as bad that Bambang Yudhoyono is a coordinating minister," said Gene Galbraith, chief executive and chairman of Asiawise.

"At the end of the day President Wahid has done a masterly job of effecting a very rapid transition to new players in the military," Galbraith said.

Galbraith said the survival of President Abdurrahman in government still represents the best outcome for Indonesia.

"Megawati would be much worse than President Wahid, who admittedly has been a bit of a disappointment," he said.

But the rise in political risk is likely to delay the return of much needed foreign investment to Indonesia.

"I think it's going to take time for people to feel there is a process in place. I think it's also going to take a recovery elsewhere, which will make Indonesia appear more inexpensive in comparison with other assets in the region," said Galbraith.

"Lastly it's going to take a determination on the part of the Indonesians, in particular the new economic team, to address the very real issue of corruption," he said.