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.