Which Way is the Wind Blowing
by Wayne Forrest
Recently Moody’s and Fitch curiously upgraded their Indonesia sovereign rating while the government fixed energy and electricity prices for two years, placing the large obligations of state-owned Pertamina and PLN at risk. Meanwhile the rupiah and stock market indexes are trending south but Bank Indonesia and the Finance Ministry are not that worried. The rupiah is flirting with 14,000, stocks are close to a 52 week low (rupiah closed at 14,007 and the JSE at 5885 on May 7) but many are saying its all about a rising Fed rate and Indonesia’s fundamentals are strong. What about the effect of a possible trade war between the US and China? How will things shake out with Indonesia’s largest foreign investor, Freeport? Can consumption pick up the slack? Sticking one’s finger in Jakarta’s air is clearly not very easy these days. I am, in principle, an optimist, always one to lend a sympathetic ear to the pro-reform policy statements of the government’s frequent visitors to the US such as Finance Minister Sri Mulyani and Coordinating Maritime Minister Luhut Pandjaitan, both of whom made strong showings at gala dinners in Washington in April. If we discount the return of energy and electricity subsidies as political moves in advance of Ramadan and the 2018 and 2019 elections, there is much to like in the government’s moves to advance tax reforms and offer holidays, alter new incentives for oil and gas producers, open new sectors to foreign investment, deliver on promised infrastructure, ease work permit processing for expat managers, and use sophisticated hedging techniques.
But as good as the technocrats and many of the reforms have been, sclerotic areas of Indonesia’s system remain: legal and judicial malfeasance, unclear halal rules, uneconomic natural resource policies, under-educated labor force, high logistic costs, ingrained patronage habits, and, perhaps most important, a political system where parties differ little on policy or ideology and seek to maximum benefits for their oligarchic benefactors. When have we ever heard an Indonesian political party leader say anything positive about foreign investment, especially during a campaign. It doesn’t happen. Maybe I am being too harsh, but it almost seems like we only hear pro investment statements when leaders visit foreign capitals or international conferences. I think most leaders know –but yet are fearful to tell the people– that the economy cannot grow at 7% without foreign investment, local money is insufficient.
So, when the rupiah devalues and Indonesians reflexively blame a stronger dollar, or other external factor (slower Chinese growth) I find the comments disingenuous. Yes, of course, with 40% of capital markets owned by foreign investors, there will be outflows and many will be temporary. But with better policies, and a more efficient bureaucracy committed to implementing them fairly, I believe more funds would stick around. Bank Indonesia has it right, in my opinion, when its senior Deputy Governor, Mirza Adityaswara, said “During times like this, apart from BI doing stabilization efforts, the most important thing is for the government to clearly convey that it will continue its structural reforms, the real economy.” I also applaud the recent remarks of former Finance Minister Chatib Basri who commented: “Foreign investors could be seeing this as no-hope for further reform. Looking at the [more favorable] United States, they would prefer to leave Indonesia. The market is very concerned about any price controls (i.e. gasoline), because they have bad experiences with Venezuela and Eastern Europe.”
Indonesia, in the long run, needs more “sticky” foreign investment, and to be less reliant on foreign bond and equity holders. But to get there, it needs to create a climate more like ASEAN neighbors such as Vietnam, who, lacking many natural resources, have created a regime in which Intel, to cite one example, has built 5 factories since 2004. I can’t think of one bellwether investment similar to this that Indonesia has attracted. Indonesians need to ask why. Only time and the will of Indonesia’s leaders will determine whether the recent turn away from Indonesia’s markets is temporary (and perhaps a “kick in the pants”) or a real change in the wind. Let’s hope its not the latter.
(The writer’s opinions do not necessarily reflect those of the American Indonesian Chamber of Commerce or its members)