Is the Indonesian economic recovery for real?

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.