Foreign investors remain reluctant to enter RI banks

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.