Indonesia's business prospects in 2001

Indonesia's business prospects in 2001

The following is based on a presentation by businessman Sofyan
Wanandi at the recent World Economic Forum in Melbourne.

MELBOURNE: Three years have gone by since Indonesia and the
region were hit by the financial crisis. Last year's World
Economic Forum proclaimed that the region is back on its feet.
Indonesia was lagging behind but it is now well under way towards
economic recovery.

Efforts to bring the economy out of the crisis have been
difficult and frustrating, largely because of political
instabilities. The country has undergone dramatic political
changes.

In fact, it has come out of a very serious political crisis in
a rather good shape. This is a major achievement that is often
not recognized. However, political instabilities cannot be
avoided.

They are perhaps inevitable. It will take time for the new
system to settle down as new rules are being formulated and re-
formulated and as a new political culture and behavior is being
formed.

The country has finally embarked on its democratization
process. It is of utmost importance to Indonesians that this
process proceeds in a vigorous manner and that the country would
neither turn back into authoritarianism nor ends up in an
anarchic situation.

This, in fact, should be Indonesia's main preoccupation. The
primary task of all its people is to make the process of
democratic transition and consolidation a success. The business
community is aware of this, but it tends to be impatient and is
frustrated by the slow progress in economic recovery caused
mainly by those political instabilities.

The business community often becomes the victim of the
political cross-fires between the opposing political factions or
between the government and the new assertive parliament. This is
perhaps unavoidable.

The business community will have to take this new situation
into consideration and will have to seek ways in order to be able
to overcome it. Key to this ability is the improvement of its
corporate governance, which includes efforts to provide good and
responsible information to the public at large.

By adopting a more open and transparent management system it
will become less vulnerable to political attacks. Herein lies the
importance of improving corporate governance. The task of
improving corporate government is a main challenge for many
corporations in Indonesia that have been so used to operating
under a more closed, secretive and collusive environment.

As the political system is undergoing dramatic changes, so too
must the business world undertake fundamental changes in the ways
in which it conducts its activities.

It is perhaps unfortunate that those political changes and the
challenge of undertaking major improvements in corporate
governance in Indonesia is happening at a time when the economy
is in a crisis.

Yet, it was the economic and financial crisis that have forced
us to make those changes. If Indonesia was not hit by an economic
crisis, it is not clear whether such dramatic political changes
would have taken place and whether improving governance would
become an agenda for the business community.

The Abdurrahman Wahid government is faced with enormous
challenges because it has to deal with urgent and difficult
problems that have arisen in almost all aspects of life and of
the affairs of the state, including the challenge of maintaining
the integrity of the state itself.

The first 10 months of its administration have been rather
disappointing. The composition of the cabinet, that was formed as
a compromise with the major political parties, resulted in an
ineffective government. At the end of August 2000, Abdurrahman
formed a new cabinet that was his own making.

This promises to produce a more solid cabinet but Abdurrahman
runs the risk of alienating the legislature. The only way the
government can overcome this political difficulty is to perform
and be able to deliver. There is a sense in the country now that
this new cabinet has the basic ingredients of a solid cabinet. As
such it will be able to deliver.

There is a limit to which the Indonesian business community
can adopt a "wait and see" attitude. As soon as there are some
indications that the government can function better, business
will expand its activities.

In the second quarter of this year the country has begun to
recover as the economy grew by more than 4 percent, driven in
part by investments, besides domestic consumption and exports.
This is likely to continue in the third quarter and beyond
because domestic investments appear to continue to increase.

Most of these domestic investments are small investments by
small and medium enterprises (SMEs) that are expanding their
activities. These investments are in areas of low risks and are
oriented mostly to the domestic consumer's market.

They are not likely to be affected by what is happening in the
political field as they are not a target of the political game.
The new economic team under Rizal Ramli is giving greater
attention to SMEs, the agricultural sector, and in particular the
development of agro-industries and agro-business. This will open
up new opportunities for SMEs.

The larger companies are still in the process of
restructuring, and once they have resolved this will they begin
to undertake larger investments. The next three to six months
will see an increase in restructuring.

External private debt, which stood at about US$70 billion at
the onset of the crisis, is now perhaps already reduced to $35 to
$40 billion as a result of restructuring, including write-offs.

Of this amount perhaps $15 to $20 billion is debt of the
multinational corporations, which should not be considered as a
burden to the country. Hence a solution to the external debt of
the national private sector is not beyond reach and can be
achieved much earlier than commonly expected.

Foreign investments will be next. Expansion of investment by
export-oriented foreign companies and joint ventures in such
sectors as electronics and textiles is gaining strength already.
Acquisition of domestic companies by foreign interest is likely
to increase as the Indonesian Banking Restructuring Agency makes
available many more restructured companies for sale. This will
help re-invigorate the investment outlook for the country.

The year 2001 will be the year of economic recovery for
Indonesia. We may expect the economy to grow by 5 percent or
more. This is still below the 7 to 8 percent growth in the pre-
crisis period, but is sufficient to create an environment of
greater confidence and hope.