Politics obscure RI economic reforms

Politics obscure RI economic reforms

LONDON (Reuters): Foreign investors are reluctant to buy into
Indonesia's recovery story as the risks from an escalating
political row between the President and military outweigh
potential gains from an impressive reform program.

With the Indonesian rupiah again under severe pressure on
Wednesday -- a 1.4 percent drop to 7,550 per dollar on the day
accumulating losses of 7.4 percent so far this year -- the risk
premium attached to holding Indonesian assets is rising again.

"You have to balance the value and recovery play against
political risk which can manifest itself not only in an
increasing risk premium being demanded for assets such as the
currency, but also in delays in the reform program," said Andrew
Salton, emerging markets fund manager at Old Mutual.

Indonesian President Abdurrahman Wahid's attendance at a
conference in London on Tuesday to reassure foreign investors on
economic policy was overshadowed by the escalating row with
former armed forces chief General Wiranto.

Addressing fund managers, he moved rapidly from questions
about the government's asset sales to the burning political
issues and stoked the fire of discontent in the military by
announcing that he would suspend Wiranto with immediate effect.

"Wahid was extremely impressive and I was impressed by the
conviction of the other presentations," said Margeret Gaddow,
Asia fund manager at Gartmore, who attended the conference. "But
I think they know that there is an element of urgency in the
reforms."

Although she praised Wahid and his team, Gaddow said the
macro-economic and political situation means Gartmore has a zero
weighting in the Indonesian stock market.

Indonesia is less than two percent of the International
Finance Corp Composite Index of emerging market stocks, compared
with 16 percent for a major market like South Korea.

With foreign funds largely absent from the Indonesian stock
market, trading is relatively thin and volatile.

The Indonesian market is the worst performer among emerging
markets this year, down more than 15 percent in dollar terms,
compared with a gain on the IFC Composite of three percent.

If the government has to deal with political unrest, it may
also be unable to fulfill its pledges to sell state assets and
reform the economy.

Gartmore's Gaddow believes that there is sufficient political
will in the government to push through reforms, but says that the
task is a weighty one.

Estimates of how much Indonesia will have to spend to
recapitalize its shattered banking system range from 50-100
percent of gross domestic product, a tall order for any country,
let alone one riven by ethnic and religious rivalries and the
potential conflict between General Wiranto's military allies and
the government.

"Because of the political situation, a lot of foreign
investors have put Indonesia on hold and that will slow down the
restructuring process," Gaddow said.

The Indonesian Bank Restructuring Agency, which is in charge
of selling off bankrupt assets, has plans to generate Rp 16.2
trillion (US$2.13 billion) from sales this year and Rp 37.5
trillion next.

The question is whether foreign investors are convinced the
crony economy of former President Soeharto has been eliminated.

The first test case is the sale of Indonesia's largest car
maker PT Astra International, which is estimated to be worth
around $500 million, but worries surfaced this week after a
bidder withdrew saying that the process had not been clear.

"Astra is a big precedent and foreign investors will watch
this very carefully to see that the government can be trusted,"
said Gartmore's Gaddow.