Simon Montlake in Jakarta looks at how Indonesia is gearing up to life without the IMF and forthcoming democratic presidential elections.
Almost six years after it turned to the IMF for emergency loans to stem a financial meltdown, Indonesia is finally preparing to go it alone. Its current IMF package, a $5bn loan agreement signed in early 2000, ends in December and the government has opted not to renew – a decision that has proven popular among Indonesians. Many fault the IMF and other lenders for exacerbating the social impact of the 1997-98 crisis.
The question now for Indonesia is what comes next? Having survived a capital outflow that bled dry the country’s reserves, Indonesia has slowly regained its footing, helped by greater political stability under President Megawati Sukarnoputri, whose economics team is credited with building bridges to foreign lenders. Officials say that should help Indonesia to finance its budget deficit and remain current on its debt after the IMF package ends.
“We want to continue the discipline we’ve achieved under the IMF in terms of the budget, curbing inflation and interest rates,” Rini Soewandi, minister of trade and industry, tells The Banker. “We have to continue [this discipline] if we want our country to be accepted and recognised by the international community, especially foreign investors.”
Terrorist attacks
Even a spate of terrorist attacks, including August’s bombing of a US-owned hotel in Jakarta, have so far failed to dent macroeconomic gains. Inflation is under control and interest rates have fallen steadily, easing pressure on the government’s debt burden. After exceeding 100% immediately after the crisis, public debt has dropped to 70% of annual GDP and is predicted to fall to 50% by 2006.
Talk among nervous financiers of debt default waiting in the wings, even another Argentina-style debacle, is long gone. Instead, bankers are talking up plans for a $400m global issue, possibly before the end of 2003. This would test the waters for the first time since Indonesia’s last Yankee bond in 1996. It would also help to fill a financing gap, put at around $10bn including foreign debt servicing, in 2004.
“The [fiscal] situation can be financed, as long as reform efforts stay on track and investor confidence can be sustained,” says David Nellor, country representative for the IMF. Most economists agree, pointing to a growing domestic bond market, tighter limits on deficit spending and positive capital inflows.
What is less certain, and more dependent on political machinations, is Mrs Megawati’s ability to close another gap: the credibility gap. Without the IMF breathing down Indonesia’s neck, can investors expect real progress on thorny structural issues like legal reform, anti-monopoly regulations and labour relations? That is a question that bankers in Jakarta are asking – and answers from the government have been slow to come.
Officials have dragged their feet over the release of a promised white paper to replace the IMF Letter of Intent by outlining policy goals for the current parliament, whose term ends in April. But bankers say that reforms will probably be bogged down in 2004 when Indonesians vote for a new parliament and, for the first time, directly elect their president.
Given this disruption, hard economic decisions may take a back seat to populist rhetoric and legislative inertia. “The remaining economic problems for the government are mostly structural and we don’t expect them to improve quickly. It will take a long time,” says Anton Gunawan, chief economist at Citibank in Jakarta.
Ms Soewandi, former CEO of Indonesia’s largest car maker, Astra International, says the government recognises that some investors will adopt a wait-and-see policy as the election approaches, given Indonesia’s bumpy transition to democracy. “Everyone is realistic – next year is election year and people want to see if democracy will be upheld.”
Bank privatisation
In the banking sector, major steps are under way to offload nationalised assets. Bank Danamon, the country’s fifth-largest bank, was sold in May to Temasek Holdings, a Singapore government company, and Deutsche Bank for $365m. Temasek is putting up the bulk of the capital but has not said much about its future plans for the bank. Speculation in Jakarta is that Singapore’s DBS might be a more suitable partner to run Danamon.
A successful $350m initial public offering (IPO) of Bank Mandiri, a state-owned giant that has about a quarter of bank assets in Indonesia, has sparked interest in further privatisations. Next in line are majority stakes in two lenders, Bank Lippo and Bank International Indonesia (BII), which were formerly part of private conglomerates, and a partial sale of state-owned rural lender Bank Rakyat Indonesia.
Analysts say that BII may prove the more attractive takeover target for foreign banks that are interested in retail exposure in Indonesia because Lippo’s former owner, the Riady family, is keen to buy back the government’s shares. Even before these privatisations, the government’s equity holdings in the sector had fallen to about 40%, marking a steady return of banks to private ownership.
Bankers say that credit has continued to expand in 2003, particularly in the small and medium-sized enterprise and consumer sector. But not every loan book is growing. Foreign banks are capping their exposure to Indonesia, while many corporate borrowers are finding the path to working capital is littered with obstacles.
“There is a rich memory of past excesses. The perception of moral hazard and risk is still high, so banks won’t lend because they’re scared,” says Eugene Galbraith, president commissioner of Bank Central Asia, which runs the largest private branch network in Indonesia.
While some people blame that reluctance on sluggish restructuring in the corporate sector, which is still saddled with bad debts, others say that legal uncertainty is holding back lenders. The IMF has pushed Indonesia to shake up its corrupt courts and give investors more protection, but bankers say progress has been incremental, at best.
Only 26 bankruptcy cases were filed in 2002, as most creditors chose to steer clear of courts when trying to resolve delinquent debt. “Lending to the corporate sector is weak, and that’s where the legal sector problems are really a concern,” says Mr Nellor.
With no national credit bureau on which to rely, Indonesian banks are still learning the ropes when it comes to credit scoring. Technical assistance from foreign banks has improved risk management at some private lenders.
Many still prefer to invest in government paper than build a loan book and risk scarce capital. “The intermediate function of the banks is not really working. Fortunately, there is an increasing corporate bond market that is helping to channel money,” says Mr Gunawan.
Foreign investment
Clearly, more money is flowing into Indonesia, driving a stock market that outpaced much of Asia in the first half of the year. At the same time, the Indonesian rupiah climbed to a three-year high that withstood the August terrorist attack in Jakarta.
Bankers say that capital investment is also being revived as factory owners begin refurbishing and replacing machinery for the first time since the crisis. “The trend is there. First, it was the stock market. Next I think we will see more direct investment,” says Pramukti Sujaudaja, CEO of Bank NISP, a medium-sized private lender.
One wild card for Indonesia, as it charts a new course without an IMF programme, is the threat of terrorism. The deadly strike at the J W Marriott hotel in Jakarta, which is a regular fixture on the business lunch circuit, sent shockwaves through the foreign community, who say Islamic militants’s targeting of foreign interests could deter fresh investment.
Hotels and offices in Jakarta responded quickly after the Marriott bombing, installing metal detectors and searching vehicles in the hope of deterring similar attacks. Optimists say the government’s increased resolve to crack down on Islamic militants – always a tricky play in a majority Muslim country – bodes well for business confidence. “Some investors have written off Indonesia. But there are others who will be back because they can make money here,” says Mr Galbraith.
