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.