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Asia-PacificFebruary 3 2004

Big predators wait in wings

Some companies are already reaping the rewards of a bold decision to invest in Indonesia’s banking sector, but one investor is asking how long they will be able to operate before the big banks decide to move in.
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Eugene Galbraith has been president commissioner of the biggest private sector bank, PT Bank Central Asia, since it was bought from the Indonesian Bank Restructuring Agency in April 2002 by a joint venture between the US investment fund Farallon Capital and Indonesia’s Djarum cigarette group.

“The opportunity that foreigners like us see in Indonesia now is that the downside from where we were buying in was fairly limited and the country offers tremendous opportunities because of its size, its rich natural resources, and the diversity and skills of its population,” he says.

Mr Galbraith, a veteran of more than 20 years in Indonesia, says that despite the increase in valuation of bank stocks, the stable economic environment and an increasingly business-friendly bureaucracy mean there are still good opportunities for new investors.

“This is potentially a very strong market for banks. It is an overbanked market, one that will see increasing consolidation – the economic logic plus regulatory guidance militate in that direction. So there remain great opportunities for any operators, domestic or foreign, in this banking system,” he says.

But, as with any business dealing in Indonesia, corruption looms large, posing a threat not just to foreign investors, but to the economy in general.

“The major problem is corruption: it is corruption in the courts, it is corruption in the tax system, it is corruption in the operating environment that is the impediment to foreigners, and that corruption is something which the government lets endure at its risk.

“People have very little confidence in the legal system so it would not be honest of me to tell any foreigner that you can refer to the courts with confidence that the outcome would be defined by the merits of the case.”

But despite this, he thinks that bigger predators are out there waiting.

“There is a competitive threat which would be itself a reflection of the success of our calculations about the business returns on banking. If you look at the large international banks here now, I think they are just waiting for conditions to be predictably smooth for them to roll out more branches.”

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Read more about:  Asia-Pacific , Indonesia