Indonesia in search of foreign investor confidence
Indonesia in search of foreign investor confidence
HONG KONG (Dow Jones): The Indonesian government officials who set out on a pilgrimage to New York to meet investors earlier this month probably had few illusions about the effectiveness of their mission.
As Asian economies recover, foreign investors are slowly starting to come back to the region, but are staying clear of Indonesia, which still has a long way to go to regain their confidence.
Given its continued political and social strife, Indonesia hasn't been able to benefit from recent investor bullishness on Asia.
Indonesia is "the only (Asian country) where we are genuinely concerned that the situation could get worse," says Roger Davis, Barclays Capital's Asia-Pacific chairman and chief executive.
Kevin Colglazier, head of fixed-income investment at CMG First State, agrees. "Indonesia is the country with the largest number of questions marks on its future," he says.
Indonesia has fallen off most investors' radar screens and it will take a lot of improvement to lure investors back.
Few funds are willingly putting their money in an economy with a central bank governor in jail and with sporadic gang warfare and social unrest.
The governor of the Bank of Indonesia, Sjahril Sabirin, is being detained for questioning. Prosecutors say Sabirin was involved in the illegal transfer of US$80 million from Bank Bali, a scandal that shook Jakarta's financial markets. Sabirin has denied the charges.
The government has been struggling to quell violence in the Maluku islands and other parts of the sprawling Southeast Asian nation.
"Political instability will create obstacles to economic reform," says Shamus Mok, chief economist at the Bank of East Asia.
The Indonesian government "will have to prove that it wants to bring solutions to creditors," such as reforming its bankruptcy law and giving guarantees to creditors, said a Paris-based emerging markets fund manager for French insurer Axa.
Before the financial crisis, Asia accounted for 50 percent of Axa's emerging markets fund, of which between 10 percent and 15 percent were in Indonesian bonds. Its Asian exposure has since shrunk to 20 percent.
According to the Axa fund manager, "there are (Indonesian) companies which make money and still have the right to chose not to pay their debt."
Even though the current situation in Indonesia is better than before last year's elections, there is a danger that it could deteriorate if President Abdurrahman Wahid fails to gain enough military support to restore order, says Barclays Capital's Davis.
Wahid "is on the right track" but still has a very long way to go, says Matt Lindsey, director of emerging market funds at Barings Asset Management in London.
And it will take strong political will on Wahid's part to clean up Indonesia's image, ensure stability and root out corruption in order to regain confidence.
Although most observers agree that Wahid is on the right track, "he seems to be embroiled in sideshows (and) can't get along with the main agenda," says Dilip Shahani, senior fixed- income analyst at HSBC in Hong Kong.
At a time when Thailand's credit rating has been upgraded, and Malaysia is next in line, Indonesia is still wearing its "Selective Default" label. Even if Indonesia's credit rating is upgraded, largely due to the recent rescheduling of its debt by the Paris and London Clubs of creditors, it's still far behind its neighbors.
To many fund managers who sit in London, Paris or New York, Indonesia just isn't worth the risk. Indonesia's benchmark 2006 bond currently trades around 640 basis points above U.S. Treasurys, but the paper is so illiquid that the spread is artificial, investors say. It should be closer to 900 basis points.
The Indonesian rupiah is weakening close to Rp 9,000 to the dollar, a 15-month low against the U.S. currency. Monday's denial from Wahid of an imminent cabinet reshuffle failed to ease investors' concerns over the country's uncertain political climate.
The next test for Wahid is the Parliament's confidence vote in August. But even if he wins the vote, he will still be far from passing the confidence on to investors.