Investor confidence to soar on successful election

Investor confidence to soar on successful election

Hanys Salmi, Kuala Lumpur

Assuming that Indonesia's presidential election proceeds peacefully up to the conclusion of the second round in September, by any logical calculation, the domestic investment climate will improve on a sudden rise in investor confidence.

Foreign and Indonesian CEOs now awaiting the final outcome of the election may then lean back in their chairs with a greater degree of confidence about redesigning their investment strategies to respond to the signals that the presidential candidates have sent out.

Except for capital goods-intensive industries which are feeling the brunt of exchange and interest rate volatility, and a few quota-reliant sectors such as textile and garment industries -- which are threatened with bankruptcy next year -- macroeconomic indicators are mainly encouraging up to this month.

This suggests that on the whole, the convalescence of Indonesia's investment climate may soon reach a full-recovery stage as of next January when the country's new Cabinet is well in place with presumably a bulk of private sector stimulus thrown in. Between now and then the new government may be preoccupied with budget recovery efforts to refill the state treasury.

Preliminary indications promising improved investment climate recovery have, in fact, been looking more and more accurate as suggested by a recent Danareksa Research Institute (DRI) survey which polled 700 CEOs and concluded that the business sentiment index had increased 0.7 percent to 113.4 points on improved performance of the expectation index, which stood at 119.8 points or up by 1.2 points from its position before April.

The DRI survey revealed one very interesting point, which may well come as negation to the prevailing public assumptions that investors would relocate their companies elsewhere for reasons of security and lack of legal certainty. The fact is that the index of business confidence on government credibility strengthened to 88.9 points, up from 88.6 points recorded prior to April 5 legislative elections. The index measured the government's credibility as against its capability in maintaining national stability, upholding law and policy certainty.

Between now and September -- if the current election tally fails to produce a majority winner -- there is bound to be slight variations in the indices, which would represent investors' attitude toward political jolts across the country. But, unless there is chaos and anarchy -- the probability of which may be remote in this compromise democracy -- investors' medium and long-term strategic plans are not going to be bogged down, analysts say.

In the event this first round of presidential election fails to produce an absolute winner, two potential contenders will contest the second round. The worst possibility would be that supporters of the contending camps would clash on the streets and security forces would be deployed to restore order.

Given the fact that political parties had channeled their aspirations through the five candidates that contested the first round, the parties would not have solid grounds to abandon the principle of objective fairness. This being the case, what the parties would most likely do, is strive for Cabinet representation and other types of political pie-sharing rewards.

Against this logic, it is safe to assume that foreign and Indonesian CEOs have just three of months of relative uncertainty, but beyond that, whoever is elected president, the country will return to normal. The September-December 2004 period is likely to become a period of contemplation for the real sector businesspeople, though portfolio investments should experience a psychological boost as is normally the case when businesses respond to the appointment of a new Cabinet.

Business should thrive from the day the next Cabinet is sworn in. Political wrangling and all the noise therein is bound to die down and the new government will devote most of its attention to completing three major agenda items -- strengthening national stability and legal supremacy, reinvigorating the business sector, including the streamlining of trade and investment regulations, and completing the regional autonomy agenda.

Fresh investment opportunities may arise in the public sector when the new government strives to absorb the labor force with short and medium-term projects. This is where the business actors need to come in swiftly given that the messages that were hammered home by the presidential candidates centered around one dominant area: Improvement of the economy through the empowerment of corporations and people's purchasing ability.

This would entail expansion of investment sectors to include more business opportunities in the agriculture, maritime, forestry, natural resource, tourism and public utility sectors -- which constituted part of the presidential candidates' campaign agendas -- introduction of new incentives for big corporations and SMEs, and the expansion of the role of the private sector in the many regencies across the archipelago.

Apart from that, toward the turn of the year, the business sector would have a clearer picture of investment opportunities when the Indonesian Chamber of Commerce and Industry (Kadin) publishes a thorough investment guide as a road map awaiting a government policy boost.

Against the backdrop of all these developments, there are ample reasons to assume that Indonesia will remain an attractive investment destination over the next five years, especially if regulations for investing in the many regions are encouraging to foreign and local actors.

The issue of land clearance, provision of industrial utilities, local government permits and labor policies may still need to be straightened out to better facilitate investors wishing to operate in the regencies. This being the case, the economic team of the next Cabinet will need to work extra hard to synchronize policies with the regencies, especially those that deal with the revenue-sharing formulae.

To business actors, however, the government should still have the ability to fulfill the minimum requirements -- improved national stability, policy clarity, transparency and certainty, and better respect for law. A major hurdle that may remain, however, is the web of illegal fees that may continue to encroach upon corporations' drive to promote competitiveness in domestic and export markets. But investors may have to live with it and redefine operational strategies given that this is the hardest nut to crack.

The writer is a researcher on Indonesian issues at a Kuala Lumpur-based company. He can be reached at hanyssalmi@malaysia.com