Funds into RI curbed by politics

Funds into RI curbed by politics

SINGAPORE (Dow Jones): Indonesia's robust second-quarter stock gains may soon become a distant memory.

Fears that presidential election results will be a protracted affair, and that violence and bloodshed in East Timor are causing liquidity to dry up could mean a listless performance at best for the Jakarta bourse over the next three to six months, fund managers said.

And managers, who held either neutral or overweight positions some five months ago, said they've gone underweight in Indonesia and don't plan to put any more money into the country in the next six months, or until the investment outlook is less murky.

"We need to see political issues settled (such as) clear results on the presidential elections and how the East Timor issue is settled," said Didier Devreese, chief investment officer at BBL Asset Management. "In the next three months, I don't see the market running up much."

Computer problems related to the Year 2000 are also expected to keep fund inflows minimal, allocations underweight and stock gains checked, managers said.

"Going into the final quarter, we're more concerned about the Y2K issue because we don't think Indonesia is well prepared," said Sheree Tan, a fund manager with Morley Fund Management.

Fund managers said they've been reducing their weighting in Indonesia gradually in the last month, with the East Timor violence being the latest in a series of problems clouding the investment outlook for the country.

The Jakarta stock market has fallen about 20 percent since July. What initially began as profit-taking developed into intense foreign-investor selling, thanks to the Bank Bali corruption scandal.

Between April and June, the Jakarta Stock Exchange had soared 52% as interest rates tumbled, inflation fell and the rupiah stabilized. But, while interest rates and inflation remain low, the rupiah has weakened about 9 percent in the wake of East Timor's vote for independence from Indonesia last week.

Political situation

With no certainty on whether the violence in East Timor will be quelled or if the presidential election process will be sorted out before the Nov. 8 deadline, managers and economists said Indonesia is in a precarious position.

They fear political developments could harm the country's economic recovery.

Economically, Indonesia isn't in such bad shape, they said.

The economy is slated to turn around this year, following a 14.5 percent contraction and with loan advances from such foreign institutions as the World Bank and International Monetary Fund.

But foreign aid, which Indonesia has become highly dependent on, could dry up if conditions don't improve.

"Indonesia is extremely dependent now on foreign aid because of its large budget deficit and costs required to fix its banking sector," said Robert Subbaraman, economist with Lehman Brothers in Japan. "It's in Indonesia's economic interests to contain the violence in East Timor because if the screws are tightened on foreign aid and that dries up, that would be a major setback for cyclical recovery."

Though managers are cautiously optimistic that Indonesia will ultimately do what it must to keep foreign capital flowing into the country, there are fears foreign institutions may pull the plug on their loans if the unrest in East Timor remains untamed.

Both the World Bank and the IMF have already threatened to freeze loans to Indonesia unless the government stops the violence in East Timor.

At stake are disbursements from a US$44 billion rescue package that the IMF is in charge of, of which US$12.3 billion has already been pledged, and US$5.9 billion in aid pledged by international investors grouped under the Consultative Group for Indonesia.

In the event that aid is halted, Lehman Brothers' Subbaraman said he fears it may force the government to reverse its expansionary monetary policy by raising interest rates to attract foreign capital.

But it could instead cause foreign investors to steer clear.

"If the World Bank and IMF cut off the money flow to Indonesia, it will cause more problems for the country," BBL's Devreese said. "The political risk premium is rising and I don't see any short-term reduction in risk."