Investors queasy over East Timor

Investors queasy over East Timor

LONDON (Reuters): International investors are rarely queasy when it comes to such niceties as human rights but the violence surrounding East Timor's independence vote last week has left some distinctly cool towards Indonesia.

After booking huge first half profits, many fund managers said on Friday they were now happy to wait out growing uncertainty surrounding not only the vote but also a high level banking scandal and November's presidential elections.

"Indonesia's not making that much sense at the moment and East Timor is not helping," said Richard Muckart, head of emerging markets at Edinburgh Fund Managers which has about US$800 million invested in the region and has been underweight on Indonesia since June.

"The long term prospects may be good but if I had spare money today would I put it in Indonesia? No, I wouldn't."

Asian investors are no strangers to violence in the region and it takes more than protesting Korean students or spilt blood in Indonesia's outlying islands to scare them away.

Jakarta's stock market, up some 60 percent since January as local interest rates have tumbled and Asia's recovery has accelerated, is still among the world's five best performers this year -- despite a 20 percent slump since its June 21 peak.

But growing international opprobrium over the violence in the East Timor referendum has compounded longer-standing worries of political instability to drive markets lower.

The rupiah currency has steadily weakened from 6,550 to the dollar at the end of June to just short of 8,000 in September.

A political scandal surrounding a $70 million payment made by Bank Bali to an official of the ruling Golkar Party may scupper desperately needed loans from the International Monetary Fund and the World Bank.

And investors are increasingly concerned about the outcome of November's presidential polls after a June 7 parliamentary vote -- the first democratic election in over 40 years -- left Golkar coming in second.

"The political risk rating is currently on an upturn and its expansion has seen a compression of asset values," said Ashok Shah, fund manager at Old Mutual Asset Management in London, who has a neutral Indonesia weighting in his portfolio.

"Even so, there may be some good news still to come -- if the army decides to behave itself, if the politicians decide to change chairs as they're supposed to and if full due diligence is brought to bear on the Bank Bali scandal," he added.

Over the long term, markets believe sound policies will prevail -- Indonesia is simply too desperate for foreign funds to rebuild its shattered banking system to ignore international opinion.

That view, and Indonesia's economic potential, is reflected in the yield spread over U.S. Treasuries of its benchmark 06 Eurobond, a measure of sovereign risk, that has narrowed from 1800 basis points at the height of last year's crisis to 900 bp in May and just 600 bp now -- tighter than Brazil.

Even so, as Australian Prime Minister John Howard condemned on Friday Indonesia's inaction to quell East Timorese violence, aid agencies said they were preparing for an emergency situation after the vote's results on Saturday and that between 50,000 and 100,000 people might flee the former Portuguese colony.

"The market may think sanity will prevail. But we'd only want to go overweight either if there was a big stock market sell-off or if people stopped being killed," Shah said.