Foreign investors' concern turns to unrest in Aceh

JAKARTA (JP): Political uncertainty in the troubled province of Aceh has become a major concern for most foreign investors in Indonesia, according to a Singapore-based economist.

Mangal Goswami of the Economic Research Group Asia Pacific said here on Monday the political problem in the oil-rich province would further reduce foreign investor confidence in the country's economy.

"They take this threat seriously," Goswami said in reference to Aceh's mounting calls for a referendum, which could lead to the separation of the province from Indonesia.

Speaking at the Cash Management and E-Commerce seminar held by ABN AMRO Bank, Goswami said the key to restoring investor confidence would depend on President Abdurrahman Wahid's handling of the Aceh issue.

Foreign investors would like to see the government use peaceful means in dealing with the Acehnese, Goswami said, adding that opening up a dialog was crucial for positive developments.

He said foreign investors feared that if the Aceh problem could not be resolved properly it would spark further social instability in Indonesia.

Goswami did not specify whether foreign investors expected Indonesia to disintegrate should Aceh separate from Jakarta, but added that "economic stability hinges on political and social stability".

He said that even before the Aceh issue investors had delayed channeling funds into Indonesia.

Goswami said investor caution was related to a wait-and-see attitude on the performance of the newly established government.

He said the fundamental soundness of Indonesia's economy was of even greater importance than the Aceh issue.

He said investors were generally upbeat about Indonesia's prospects and had expressed their intention of returning to the country.

Goswami said investor confidence had been boosted by diminished political risks and the election of a President who had a grasp of Indonesia's key problems.

"Investors have switched the question from whether they would invest in Indonesia to when they would invest," he said.

Goswami projected that starting from next year foreign investments would gradually pick up, but that any improvement was dependent on resolution of the Aceh issue.

In regard to Indonesia's overall economic outlook, he said that economic recovery would largely depend on the combination of foreign direct investment and restructuring of the banking sector.

He said investors would place their funds in export-oriented sectors, and cited the textile and shoe industry as lucrative opportunities.

He said the agriculture sector, which has reaped huge profits during the economic crisis, did not hold huge appeal for foreign investors.

Goswami was optimistic that exports would rise sharply, not only because of foreign investment flows but also due to a stronger demand for Indonesian products.

In the financial sector, he predicted banking interest rates to further decline to about 11 percent by early next year, from the current 13 percent.

"It's normal that interest rates drop sharply after a crisis," he said, but added that he expected interest rates to slowly climb after bottoming out at 11 percent or 12 percent.

He projected that Indonesia's interest rates would then attain their pre-crisis level.

Separately, ABN AMRO Bank country manager Pieter Van den Akker said foreign investment was vital in reviving Indonesia's economy.

Akker declined to confirm talks on ABN AMRO's intention to acquire several Indonesian banks.

He said Indonesia's banking crisis was unprecedented in history, describing the cost for restructuring the banking sector as "phenomenal".

He said bank's loan portfolios had generally been negative but that he expected the situation to change so that such loans would start to pay interest again.

ABN AMRO's role in attracting foreign investment would be as a source of information to investors regarding Indonesia's economy, he said, adding that ABN AMRO was the oldest foreign bank in Indonesia.

Akker said that with its global network, the bank would also provide trade financing to boost Indonesian exports. (03)