Foreign investors remain reluctant to enter RI banks

By Reiner S

JAKARTA (JP): Foreign investors will not enter Indonesia's cash-strapped banking sector if uncertainty in the political and economic fields continues, according to a foreign fund manager.

Gerry Grimstone, vice chairman of the London-based fund management firm Schroders said foreign investors wouldn't channel the massive amount of fresh money needed to recapitalize the country's ailing banking sector unless the risk of investing here could be measured.

He said that political and currency stability, as well as consistency in government policy were the key factors in attracting foreign investors to enter Indonesia.

"I think once the foreigners understand what the future looks like, there will be the appetite here. But at the moment they find it very hard to estimate the risk. They can't work out whether something is worth 100 or 10. Once they can understand the risk, I wouldn't be surprised if they wanted to invest here," he told The Jakarta Post in an interview on Friday after speaking at the Indonesia Forum business conference.

Schroders is among the largest foreign investors in the country's capital market with outstanding total investments of around US$1 billion.

The sharp depreciation of the rupiah against the U.S. dollar has sent the Indonesian banking sector into a tailspin.

The government has injected more than Rp 140 trillion (US$18 billion) to help troubled banks meet withdrawals made by panicked depositors in the wake of plunging confidence. It is now trying hard to get back the money by selling the fixed assets in the form of various companies surrendered by owners of the banks.

The government has also pledged to provide 80 percent of the financing needed to recapitalize the banking sector to meet the minimum 4 percent capital adequacy ratio requirement by the end of this year.

Part of the recapitalization measures would be to takeover the massive volume of banks non-performing loans, which would be repackaged before selling them to investors.

The government has said that it would issue bonds to recapitalize the banking sector, which would be sold to investors in three to five years time.

Grimstone estimated that some $13-19 billion in new capital would be needed to recapitalize the Indonesian banking sector.

"The problem is the only sources at present for the money are trade and portfolio investors, vulture funds, the Indonesian government and multilateral agencies," he said.

"Foreign investment is a vital component, but it requires political and currency stability," he added.

Violent clashes between student protesters and security officials reemerged on November 13, followed by looting and arson the next day in Jakarta, as a manifestation of widespread protests over the country's slow political reform. The bloody clashes caused deep concern among investors over the country's political stability, which became unstable following the killing of students, rioting, looting, and arson in May which led to the downfall of former president Soeharto. The country is planning to have a general election next year.

Although the rupiah has considerably strengthened to around Rp 7,500 to the dollar, compared to Rp 14,000 in June, many say the currency remains volatile due to a combination of political instability and economic factors.

"The questions people often ask are ' where is the bedrock, when can we know that things won't get any worse in Indonesia? When is the stability coming back?' I think the politicians, business leaders and all who are concerned for the future of Indonesia have to look for that bedrock," Grimstone said.

He also said that a consistent government policy was an important ingredient in reviving the shattered financial sector.

"Indonesia needs strong and consistent leadership in economic management to get out of its current position," he said, pointing out that government policy must be clear and realistic.

The way the government handled the repayment of the more than Rp 140 trillion in liquidity support injected into troubled banks was a good example.

President B.J. Habibie initially demanded bankers return the money in cash in one year, but this was seen as unrealistic by the bankers, so it was then extended to four years following pressure by the IMF. Demands from certain people in the political elite to use the fixed assets, surrendered by the bankers to repay their obligations, as a means of wealth distribution has increased the obscurity of these matters.

Grimstone also said that economic data must be timely, reliable and widely circulated to give rise to confidence in the country because people could then see the real picture of the economy.

"I think more can be done here in terms of circulation of reliable economic information," he said.

"The capital market won't return to Indonesia unless confidence is created," he added.

"But the good news is that we have found multinational corporations are already interested in Indonesia as they see a great future here, but not many are willing to invest immediately as they're studying the situation," he said.

He explained that a proper implementation of the country's privatization program would be a very important ingredient in reviving foreign investors confidence.

"I think it is very important for the privatization program of Indonesia to move away from the concept of individual sales to be much more of a program for reaching macro-economic objectives," he said.