Why Indonesia is positive it can reach its potential

HSBC points out that short-term private debt of US$22.6 billion “should be seen in the context of US$51 billion in FX reserves, a US$12 billion swap line with Japan, swap lines of US$3 billion each with China and Korea, US$ 6 billion in standby loans from the World Bank, the Asian Development Bank, etc, US$1.5 billion in programme loans and project loans, and US$1.5 billion in Japan-guaranteed samurai issuance. Overall, then, we think the concern has been overdone.” Helmi agrees. “Compared to foreign reserves, corporate sector external debt doesn’t appear to be out of line with our peers in the region; Korea has a much higher proportion.” An acceptance of this view seems to have helped Indonesia get its pivotal $3 billion bond away earlier this year (see next article).

This is one of the reasons the currency has been strengthening and looks likely to go further. Barclays recently revised its target to Rp10,000 to the dollar having previously been, as economist Sailesh Jha puts it, “the most bearish guys on the street on Indonesia.” Danamon forecasts a range between 10,600 and 11,200. Macquarie predicts 10,500 for the end of this year and 9,000 by the end of next year. (Having been at 12,000 to the dollar in February, the currency had strengthened to 10,800 at the time of writing.)

Still, it would be inaccurate to say that everything is going right in Indonesia, and some are alarmed already at the level of praise coming its way. “There is an enormous heaping of international praise right now,” says one observer. “Indonesia burns brighter and brighter by comparison to the rest of the world, but there are still a lot of things that could go wrong.” Many of these are political: a boycott of the presidential elections has been mooted by former president Megawati; SBY, as the president is universally abbreviated, may find he still has to appease coalition partners and so not make vital cabinet changes; he may find parliament does not share his view for continued reform; and if the global recession continues longer than expected, Indonesia will inevitably be dragged in further. “Indonesia was clearly one of the last countries into this global slowdown,” says Wallace. “If commodity prices pick up before the rest of the world economy, Indonesia could be last in first out if it’s truly lucky. But we’ve all seen too much volatility to be sanguine about anything at this point and you still have to be prepared for shocks.”

Indonesia has not come through the crisis completely unscathed: the Bakrie group, embracing six major listed companies, ran into serious trouble late last year and all six stocks were suspended in October following rumours the group was in default. The impact had a major negative effect on stock market turnover, now apparently beginning to reverse. Elsewhere, foreign direct investment should clearly be higher than the $2.1 billion of 2007 (2008 figures were still not available at the time of going to press) and there are still regulatory and legal hurdles that must be overcome in order to attract greater investment into areas such as mining and power.

Besides, problems like infrastructure remain. There was a lot of hope in recent years, as Indonesia hosted a sequence of high-profile infrastructure summits, that public-private partnership models were going to help Indonesia redress the shortfalls that have, as Wallace puts it, “stopped Indonesia firing on all cylinders” and therefore restricted growth. They haven’t done that. There is a feeling that at the local level, roads and underpasses and so forth are getting built, and that there is progress in the power sector, but the really big-ticket items like toll roads and ports remain mired in issues such as land acquisition disputes. “There has been some progress, but glacial,” says Wallace.

There is a hope that a new term for SBY will fix some infrastructure challenges, but as Helmi says, “the problem with infrastructure is not only related to the president’s role in parliament but the effectiveness of government at the lower levels. Like in tendering, they have not managed to resolve the problem of why it takes so long before construction actually starts. And we still have land acquisition problems which I don’t think can be solved by the president having more support in parliament.”