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.