Trying to Return to the Investment Radar

Trying to Return to the Investment Radar
By Lin Che Wei, CFA*

As the government endeavors to put its house in order for a
better economy, the inter-related areas of debt, the banking
sector, privatization and investment all need to be tidied up.
While the medium term outlook has shown improvement thanks to
political and macroeconomic stability, the country is still
struggling to restore its banking system to good health, and the
privatization program remains in jeopardy due to a lack of
direction.
The government focus on stimulating investment has yet to
be borne out with results. Overall, the economic outlook is
improving but it remains vulnerable to external shocks. It is
important for Indonesia to adopt a more comprehensive strategy to
revive its banking sector and enable privatization to proceed
smoothly.
Indonesia has been able to reduce the public debt level from 120
percent of Gross Domestic Product (GDP) at the peak of the crisis
to 78% now. Still, Indonesia is in the process of managing its
cash flow issues in its debt management; the amount of debt which
will mature in the next few years is mounting.
With the initiative to "reprofile" this debt, obviously
Indonesia will have a more conducive macroeconomic environment.
Despite the gains, one question remains unanswered - will real
structural reform accompany the post-crisis period?
Indonesia is shouldering a substantial amount of debt which will
have to be amortized over the next generation, but it has failed
to seize the momentum of the crisis to conduct wide-ranging
structural reform. From the crisis point of view, the country
will no longer need the International Monetary Fund (IMF) to
guide its economic policy, but its commitment to adhere to
structural reforms without pressure from multinational agencies
has yet to be proven.
Based on the UNCTAD report in 2002, Indonesia has recorded
negative foreign investment flow since 1998, unlike Malaysia and
South Korea which have turned around this aspect of their
economic portfolio.
In the medium term, I estimate Indonesia's investment climate to
improve a little bit due to better macroeconomic factors and
political stability. Natural resources and low value added
industry will continue to be the areas of interest.
It is a paradox that the government's declared determination to
attract foreign investment is not complemented by proper
treatment of existing investors. And the factors which contribute
to weak foreign investment are well recognized.
First, the biggest problem is political stability and security
issues. With war raging in Iraq, Indonesia, the world's largest
Muslim country, may well be perceived as a country laden with
potential problems.
The second factor is uncertainty concerning the volatile labor
market, followed by the lack of coordination between the central
and local governments concerning the implementation of
decentralization, which often creates confusion for the investor.
Fourth is the often confounding web of bureaucratic licensing and
customs issues. Ranking fifth is woefully poor legal enforcement,
brought to international attention through the Manulife, Polaris
and Panca Overseas Finance cases. It's a sad and embarrassing
fact that the courts are more often manipulated to protect
powerful, well-connected parties than to uphold the law.
These factors contributed to Indonesia's dismal ranking on the
2002 Index of Economic Freedom. Ranked 99 out of 161 nations,
Indonesia was not only lower than the "to be expected" Asian
neighbors of Singapore, Thailand, Hong Kong and Malaysia, but
also trailed Cambodia and the Philippines, much smaller nations
which have struggled with their own profound socio-economic woes.
Yet, the lowly rank was a given when the very factors which
undermine economic freedom - weak banking/financial
infrastructure, disregard for property rights, rampant corruption
- continue unabated in Indonesian business.
The banking sector is likely to remain weak, despite the
completion of recapitalization. We have yet to see a strong bank
emerge, and mammoth sales of bad loans did not help the asset
quality of the banks either.
Sales of unrestructured loans back to the banking system carry
the potential for bad debt in the future. Obviously, this is not
a paramount concern for the Indonesian Bank Restructuring Agency
(IBRA), which is more interested in closing down its operations
as soon as possible.
In the next three years to five years, the Indonesian banking
system will continue to consolidate. After the gradual removal of
the blanket guarantee, we are likely to see a further
consolidation of the banking system through merger or liquidation
of smaller banks.
Unfortunately, loan growth will continue to focus on the
consumer sector, with little assigned to investment purposes.
With demand for investment continuing to be low and the banking
system focused on resolving its low capital base, it's doubtful
the banking sector will be able to resume its financial
intermediary function soon.
The focus for the government in the next few years will be
selling its stake in the recapitalized banks, those institutions
which it bailed out during the crisis. Regrettably, it seems the
government is content to absorb the losses, but it is essential
that it verifies the credibility of future owners.
It's an issue that puts the government in a real dilemma because
it could entail selling the banks to foreign parties, meaning
that the largest national banks would eventually be partly owned
or controlled by foreign shareholders under the government
divestment program.
Granted, the presence of foreign banks is positive to a certain
extent because, as globally recognized international
institutions, they would not resort to the wanton abuse of the
banks for their own lending needs.
By the same token, it is crucial to recognize that the objective
of these banks might not be in line with the development policy
of the government. In this aspect, a strong regulatory
environment and accompanying policies are needed to ensure that
the two objectives can be met.
The privatization program remains one of the most controversial
issues, with those with vested interests, politicians and trade
unions quick to whip up nationalist sentiment to foment
opposition.
The biggest problem in proceeding with privatization is the lack
of a blueprint for state owned enterprises (SOEs). In Indonesia,
the government seems to be more interested in the final step of
the privatization -- the selling process itself -- rather than
the preparation.
There are many prerequisites for effective privatization,
ranging from its legal framework, legislative endorsement, the
existence of a blueprint and long term strategy and, most
importantly, the presence of a credible and non-corrupt
government for its execution.
Before the government starts embarking on privatization, the
blueprint must be in place. Currently, there is only the plan
left behind by former minister of state enterprises |Tanri Abeng,
and that document is already outdated..
The fundamental objectives of the privatization and the basic
guidelines determining which enterprises should be privatized
must be discussed thoroughly and transparently with all related
parties.
The government must realize that privatization is not a quick
fix for what ails state-owned enterprises through a change of
ownership. For the long term good, it needs to focus on creating
a more competitive environment in the enterprises through sincere
efforts to eradicate corruption and establish proper regulations.

The writer is a chartered financial analyst based in
Jakarta.

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