Restoring investor confidence

Restoring investor confidence

The following is based on a presentation by economist and
chairman of the Indonesia Forum Foundation Mohammad Sadli at the
ISEAS Forum on regional strategic and political developments. The
event held by the Institute of Southeast Asian Studies took place
in Singapore on Aug. 29.

SINGAPORE: The economic recovery in Indonesia started during
the second half of 1999, if recovery means that the economy is no
longer contracting. During the height of the crisis in 1998, the
economy contracted by almost 14 percent, the most severe in East
and Southeast Asia.

The recovery was started by a resumption of consumption;
consumers started to spend from current income and from past
savings.

During the first quarter of the year 2000, Dana Reksa Research
Institute, which initiated a Consumer's Confidence Index,
reported increasing rates. This index, however, dropped slightly
since April 2000, although still remaining above 50 percent
(meaning more than half of the respondents replied positively).
It started to strengthen again in July, but the figure is still
less than 60 percent.

The recovery, started through consumer spending, received
support from a good export performance. Overall export figures
for 2000 indicate strength, but this is because of very buoyant
oil prices.

It may reach US$60 billion, which is a bit higher than the
pre-crisis level of US$55 billion. Non-oil exports also picked up
during the year, thanks to the weak rupiah.

Recently there have been signs of resumption of construction.
Gross domestic product (GDP) figures for the second quarter of
2000 indicated positive growth in the construction sector.
Growth in the agriculture sector in the same quarter was
negative, but this is a seasonal phenomenon.

In spite of this, the quarterly growth figure was 4.1 percent,
hence giving promise for a 4 percent GDP growth rate for 2000.
This figure showed up in optimistic predictions, although the
worse scenario figure was closer to 1 percent.

If the economy really picks up after the recent political
reshuffle, then perhaps it can enjoy a closer to 5 percent growth
rate. For the year 2001 this growth rate will then be better than
5 percent. If all this comes true, it forebodes well for
Indonesia's future.

Investments have fallen sharply since the crisis. The present
economic recovery is led by consumption and exports, not as yet
by investments.

Recent statistics issued by the Investment Board, however,
indicate that there has been some rebound in foreign investment
approvals during the first semester of the year 2000 (655
projects totaling US$2,325.1 million) as compared to the first
semester of 1999 (519 projects, stated at US$1,849.8 million).

On the domestic investments side, however, there was a decline
in value but not in the number of projects. Total investments for
the first semester of 2000 lay in 146 projects, totaling Rp
12,914.8 billion, while during the first semester of 1999 there
were approvals for 106 projects with total stated investments of
Rp 19,255.6 billion.

Hence in the domestic scene there has been a shift to smaller
projects in all three categories -- new projects, expansions and
a change of status from foreign to domestic investment -- which
is very plausible.

The major causes of the decline in investments have been: (1)
drying up of bank credits both from inside and outside the
country, (2) an uncertain political climate, (3) insecurity on
the ground because of lawlessness and the emergence of new and
more aggressive labor unions, (4) policy confusion between
central government general policies and some sectoral and
functional ministries (e.g., conflict between new environment
policies and respecting old contracts or investment permissions).

Looming in the near future are the consequences of devolution
of powers to districts and provinces; for instance, which
authorities will have to approve new entries?

In the short run, improvements of the investment climate can
only come from a change in the makeup of the central government.

This can instill greater confidence in the market and hence
produce a more stable rate of exchange of the rupiah and less
undervaluation.

Through better policy coordination and greater professional
input in policy making -- such as less intervention from the
President -- policy consistencies may be improved and ambiguities
suppressed.

The sorting out of investment policies and administration in
connection with regional decentralization, however, will only be
resolved during 2001 at the earliest.

Lawlessness and lack of security with respect to large
investments in mining and agribusiness in the regions, however,
will probably be overcome more slowly. The same may be true with
respect to industrial peace because the dust of the new labor
relations law has to settle.

During the time of uncertainty the companies have mainly to
mend their own fences. They have to improve community and
industrial relations through dialog, interactions, recognition of
changing times, and more effective public and social relations.

In the end they may have to pay more, or endure increased
costs, but Indonesia being still a poor country (hence with cheap
labor) increases in cost of labor, personnel and community
relations may not make Indonesia internationally uncompetitive --
except perhaps vis-a-vis China.

The domestic market is still huge and some protection will
always be available. Most foreign investment companies have also,
in relative terms, much greater (rupiah) costs for raw materials,
imported other inputs, amortization and interest payments, rather
than "personnel costs".

New investments in mining will not be forthcoming in the new
future. A new mining law is being drafted but the existing draft
accommodates perhaps too many demands from the environmental
movement and the demand for "people's economy" (such as demands
for partnership with cooperatives, for early divestments).

Moreover, the role of the central government and the district,
or provincial, governments in the approval system is still
unclear.

New investments in large-scale plantations may also not be
attractive because of the pressures from local people and the
people's economy movement.

The production pattern consisting of "nucleus and plasma" for
plantations may be more promising as the "plasma" part consists
of small-holders in cooperation with the conventional (nucleus)
part controlled by the investor.

When law and order will effectively return in Indonesia which
is still undergoing major political and social transformation, is
very hard to predict.

The best assessment is that "things will somehow improve,
slowly and bit by bit". A greater understanding of the still
ongoing political and social processes can help the investor
reduce his risks while maintaining confidence in the future of
the country and its market.

Investors already in the country for a long time see things
differently, and have different interests to the new entries.

Existing foreign investors are usually sticking it out because
they have to protect their sunken investments and the majority
can still cope with the reigning uncertainties without damaging
their profit-and-loss position irreparably.

New investors could find bargains in the sale of current
assets. The crisis has produced many winners and losers. Some of
the winners can buy out some of the losers, as can be seen today
in the banking sector, real estate, hotels, supermarkets, etc.
The economy may end up more in foreign hands, but the alternative
is prolonging the slow recovery.

Indonesia is in the end still part of South and East Asia, a
very dynamic region, which will pull itself up from the deep
crisis.

The investment behavior in this region has been marked by
contagion and emulation. Hence what is happening, for example, in
Bangkok and Thailand, will sooner or later repeat itself in
Jakarta and Indonesia, as long as Indonesia maintains an open
economic system. That was the case in the plunge towards the
crisis and will repeat itself in the climb toward recovery.