Indonesia kicked off 2004 on top form. On January 9 the Jakarta Stock Exchange (JSX) index hit an historical high at 753.692 points, topping its previous peak of 740.833, reached on July 8, 1997.
The market was driven up by a regional market rebound and a genuine optimism that Indonesia’s long-languishing economy is making a comeback. The central bank, Bank of Indonesia, estimated that the country’s GDP grew nearly 4% last year and should achieve at least 4.5%–5% growth in 2004. The Jakarta bourse’s index increased by almost 80% in dollar terms in 2003, and another 10% in the first three weeks of 2004.
On the face of it, Indonesia’s macroeconomic picture looks pretty good. The rupiah has stabilised, the budget deficit in 2004 is expected to go down to 1.2% of GDP, inflation was less than 10% last year and interest rates are at an all-time low – reaching 8.5% in mid-January.
Attracting investment
The big question remains whether surging stock values, improved bank liquidity and macroeconomic stability will translate into a corresponding increase in domestic and foreign direct investment (FDI) this year. Even by regional standards, Indonesia has performed badly in attracting new investments to the country, which has suffered a plethora of problems since the Asian financial crisis broke in 1997, sending the economy into a tailspin.
Economic collapse in 1998 led to the downfall of former strongman President Suharto and the crumbling of his New Order regime, which had kept the vast and various Indonesian archipelago glued together for 32 years under strict autocratic rule.
Trouble spots
The post-Suharto period has been marred by political uncertainty (three presidents in six years); violent sectarian clashes between Christians and Muslims; increasing crime and poverty and the emergence of home-grown extreme Islamic terrorism. Some of the problems can be blamed on Mr Suharto, who left the country with few strong political institutions. While the government of President Megawati Sukarnoputri has done much to restore order and combat terrorism, foreign and even domestic investors have shied away from the country.
Between 1998 to 2002, Indonesia suffered an annual net outflow of foreign investment that totalled $12.5bn. Approvals of FDI fell from a peak of $33.1bn in new projects in 1997 to an estimated $9.7bn in 2002. The track record for domestic investments was worse; approvals fell from Rp119,800bn ($14.3bn) worth of new Indonesian investments in 1997, to only Rp25,300bn last year.
Election year
Investors, both foreign and domestic, are expected to avoid Indonesia in 2004, when the country is likely to hold three crucial elections: a general election on April 5, a direct presidential and vice presidential election on July 5 and a possible follow-up presidential election on September 20 if the first fails to give one candidate a clear majority. Most investors are taking a wait-and-see stance this year on the elections’ outcomes.
Not everything can be blamed on Mr Suharto. A survey of foreign businesses conducted by the World Bank and Asian Development Bank late last year on why they were staying away from Indonesia found three main reasons: macroeconomic instability, policy uncertainty and corruption. Policy uncertainty can be blamed squarely on President Megawati’s administration, which has been in place since July 2001.
Mixed directions
“I think the government has now clearly recognised the issue of the investment climate and some parts of the government really want to address it, but at the same time the government is not organised and the policy measures are not uni-directional. Some ministers want to go their own way,” says Bert Hofman, lead economist at the World Bank in Indonesia.
For example, the labour minister has backed legislation that will require all expatriates working in Indonesia to be fluent in Indonesian. The revenue department has drafted a law that allows it to apprehend tax evaders without police consent, and the justice minister has dropped a free visa-on-arrival policy for most foreign tourists entering the country at a time when its tourism has already been hard hit by the October 2002 Bali bombing (that killed 202 people, mostly tourists). Such regulations, even if they are not implemented, have sent a negative signal to investors.
The World Bank has stressed the need for Indonesia to attract more FDI as a crucial step towards job creation and poverty reduction. In 2003, some 8.5% of the labour force was unemployed, up 1% from the previous year. While 4% GDP growth is good by international standards, it is insufficient to provide employment for the 2.5 million Indonesians entering the labour market each year.
The country’s past trade performance is another worry and a reflection of its growing lack of competitiveness. According to the World Bank, Indonesia’s share of the world market in its top 30 non-oil export products has fallen from 2.9% in 1997 to 2.7% in 2002.
Export loss
As FDI shifts to China and Vietnam, so have exports. Indonesia’s exports in labour-intensive industries such as garments, shoes, plywood and furniture have all lost market share to China, while other sectors such as shrimp and rubber are losing share to Vietnam. With the multifibre arrangement (MFA) looming, Indonesia is expected to lose 100,000–150,000 jobs in the textile industry alone this year to China.
“The textile industry in the country is being competed away by China,” says Fauzi Ichsan, an economist at Standard Chartered Bank in Jakarta. “Even before the Asian financial crisis many of Indonesia’s industries were no longer competitive in the export market,” he notes. These export industries were given a breather by the devaluation of the rupiah, but now Southeast Asian currencies are once again strengthening against the dollar. Little has been done to develop new areas of sectoral strength over the past five years. “The problem is not specifically with China; the problem is how to improve the investment climate in Indonesia,” said Mr Ichsan. Local manufacturers complain of rising production costs in Indonesia – including the cost of corruption.
Five years of democratic rule have broadened Indonesia’s endemic corruption. In 2003, five years after Mr Suharto’s fall, the Berlin-based Transparency International ranked Indonesia among Asia’s most corrupt nations. “Before we had authoritarian corruption, but now we have an equal distribution of corruption,” jokes Teten Masduki, head of Indonesia Corruption Watch. Corruption costs have been decentralised in tandem with implementation of the country’s autonomy policy, which allows local government greater authority to tax and control businesses in their area. President Megawati has proven ineffective in stopping the rot.
Candidate choice
In the struggle to come clean, much depends on the outcome of the upcoming general and presidential elections. Efforts are under way to encourage political parties to chose reputable candidates and to educate voters not to support tainted politicians. The University of Indonesia alumni association has threatened to issue a list of “bad egg” politicians, while various non-governmental organisations have set up a National Movement for Not Electing Rotten Politicians. Few expect these efforts to work miracles.
Opinion polls indicate that the Golkar party, the political vehicle of Mr Suharto during his 32 years in power, and the Indonesian Democratic Party of Struggle (PDIP), led by Megawati, are likely to win the largest number of votes in the general election. The two parties are the leading partners in the current coalition government. “If there is another coalition between PDIP and Golkar, it’s going to be difficult to solve corruption,” predicts Mr Masduki.
Ironically, while decentralisation has spread corruption nationwide, the process may also be leading towards greater accountability among local politicians on the regional level and has raised hopes that a new crop of politicians is emerging in Indonesia who will be less tainted by Suharto-era diseases.
Future hopes
“My hope is more in the elections five years from now, because this generation of politicians has to go,” said Fritz Kleinsteuber, president of the German Indonesian Chamber of Commerce. “The old kings from the Suharto days are still around, not only in the government but in the administration, the economy, everywhere.”
Indonesia, however, may not have another five years to get its act together. Much has been done in the past two years to restore macroeconomic stability, such as strengthening the rupiah currency, reining in inflation, reducing public debt and fortifying the banking system. While the country graduated from the International Monetary Fund (IMF) programme this year, President Megawati’s government has issued a White Paper that laid out impressive guidelines for meeting budgetary needs through international bond offers, more efficient taxation collection, privatisation plans and pushing through measures to attract investments. Whoever wins the general election, and the following presidential election, will need to make sure those promises are fulfilled.
Conditional success
“If the government delivers on the commitments it has made in such impressive documents as the White Paper and the Supreme Court blueprints, then growth in Indonesia is set to take off,” said Jemal-ud-din Kassum, World Bank vice-president for East Asia and the Pacific Region, at a year-end press conference. “But significant slippage, especially on improving the investment climate and governance, would put emerging gains in market confidence at risk,” he warned.
