Is the Indonesian economic recovery for real?

By Eddy Soeparno

JAKARTA (JP): Recent economic indicators suggest that the Indonesian economy is on its way to recovery. Inflation seems to be under control, therefore allowing interest rates to soften, while consumer goods (especially basic needs or "Sembako") have gradually come down making them more affordable to the public.

The picture gets even better: the rupiah has strengthened by 40 percent over the past two to three months, activities in the stock market have picked up and exporters previously being denied opening trade facilities by their bankers, have now slowly picked up their pace of business once again.

However, underneath the surface lies a bleak picture, notably on the economic front (as the political outlook would best fall under the "grim" category): the various types of foreign capital, be they in the form of foreign direct investments, bank loans or portfolio investments have all but returned to the country.

And looking back at historical data, Indonesia's economic miracle was supported by three primary pillars, namely revenue from the export of natural resources (mainly oil and forestry products), foreign direct investments and offshore borrowings.

And in the absence of the latter two, it is widely anticipated that the economic recovery will actually come much later rather than sooner.

Although this part of Asia has among the highest savings rates in the world, nevertheless the modernization and industrialization of Indonesia over the past three decades required capital beyond that available in bank deposits or public savings accounts, thus creating the need for foreign funding.

With today's oil prices at all time lows and forestry products in neck-and-neck competition with other woodbased producing countries, an economic comeback minus offshore capital practically puts Indonesia off the road to stability, let alone recovery.

Even the recent strength in the rupiah does not reflect the actual fundamentals of the currency, as it is clearly supported through indirect interventions, namely by progressively converting IMF-sourced funds into rupiah to carry out various social safety net programs.

Despite continuous denials of such actions by the central bank, however in a thin market where the rupiah is currently traded, even bystanders can notice the active parties involved in buying up large rupiah positions. And they sure are not speculators or hedge fund managers.

Also misunderstood is the recent pick-up in activities on the Jakarta stock market, suggesting that foreign capital has made its way back into the country. This perception, unfortunately, is not entirely correct. In the light of an extremely weak rupiah, followed by a number of bankruptcies as well as corporate liquidation, foreign funds that have actually reappeared in Indonesia are only those related to buying distressed assets currently offered at fire sale prices.

Looking at present economic data, the net foreign direct investment number has dropped significantly, though logically. Therefore, recent activities in the stock market are more "bargain hunting" driven, rather than investment driven.

And since hardly any of the capital inflows were dedicated to production increases in the real sector, it could be safely assumed that most of this incoming capital is allocated for the acquisition of assets, mostly owned by recession-plagued corporations and banks.

Besides the issues of capital inflow and misperceived stability, the fate of an economic recovery also lies in the settlement of the foreign debt problem as well as recapitalizing the banking sector.

The former has been addressed recently by both the IMF and the government in an attempt to relieve the corporate sector from immediate debt obligations. Nonetheless, much of the foreign debt is still in renegotiation with their lenders and therefore remain unsettled. That is when the government decided to actively facilitate discussions between borrowers and their lenders.

However, government efforts to mediate negotiations could only prove effective provided active mediators are involved in the discussions. Furnishing negotiation groundwork and facilitation efforts are simply not enough, unless active and experienced facilitators are in the picture. As such, professional expertise and not merely guidelines are urgently required in the mediation efforts to bring banks and their debtors closer to reaching a solution.

And in going about their task of revamping the crippled banking sector, the government should clearly state the actual conditions of each troubled bank prior to injecting public money into them.

Just as a reminder, it is taxpayers money used to recapitalize the banking sector, therefore taxpayers have every right to know who their money will end up with.

The government should also realize that their hesitation in closing up more banks, including some clearly insolvent state banks today, may cost the public more money in the future, should these banks be allowed to survive using a life support system in the form of liquidity facilities from the central bank.

As such, the government does not need to be shy in acknowledging that the concept of "too big to fail" should in fact be replaced by a simply "too much to save" concept.

Finally, to answer the question of whether Indonesia is in the midst of an economic recovery, one must be given the opportunity to analyze the entire economic picture and not merely a handful of indicators as normally presented to the public.

Although a stronger rupiah and lower interest rates put Indonesia in an operating environment to start its economic recovery, however to complete such a recovery, investors (both foreign and local) are urged to repatriate capital back into the country in the form of productive investments.

On the other hand, corporate borrowings need to be restructured and the intermediary function of the banking sector has to be restored. As such, a strong rupiah and lower interest rates are simply vague indicators to confirm a reversal of this miserable economic trend.

Banks have to start lending again, investors have to start building up factories and creating new jobs, while unpaid borrowings have to be restructured. Until this is achieved, Indonesia will always remain on the brink of economic recovery but never actually recover.

And there is enough evidence out there to tell us where we will be in the near future if this does not materialize very soon.

The writer is a director at a foreign bank in Jakarta. The article represents his personal views.