Troubled road ahead - Indonesia politics - Brief Article

Business Asia, Dec 13, 1999 by Will Dempster

Indonesia's new leaders have a mandate to impose change -- but the past will continue to haunt them

Investor sentiment towards Indonesia has improved since Abdurrahman Wahid's election as president, but there are many obstacles to overcome in the next year if he is to lure foreign investors back.

Improved sentiment has lifted the benchmark Jakarta Composite Index 7 per cent Since the election. Although this cautious inflow looks speculative rather than long-term, it shows expectations of a new year rally, probably after first-quarter results are announced and any Y2K glitches have been dealt with.

Meanwhile, direct investors will be looking to snare cheap, quality assets as they come up for sale as part of the Indonesian Bank Restructuring Agency's (IBRA) huge privatisation program, which involves selling many of the assets it acquired when it nationalised seven large banks earlier this year.

IBRA is presently preparing to float 30 per cent of one of its jewels, Bank Central Asia, on the Jakarta Stock Exchange early in February.

With equities tipped to rise and a continuous stream of quality assets coming up for sale, Indonesia would ordinarily be a prime destination for investors in 2000. But that is the good news. The bad news is that the problems with bank and debt restructuring could threaten everything.

The government has issued hundreds of trillions of rupiah in bonds to recapitalise the banking sector, but this has done little to improve their cash Row. Banks are recapitalised, but they are getting little in loan repayments because many companies are in the middle of debt restructuring talks and are not making repayments until agreements have been reached.

And with most debt restructuring deals likely to involve a three-to five-year grace period on principal payments, banks will still not have a significant cash-flow stream even once debts have been restructured.

With no source of cash flow, it will be hard for banks to lend even to viable Indonesian companies, which is a necessary condition for economic recovery. Banks could sell some of the bonds but it is unclear how they will trade on the secondary market.

Clearly, opportunities for foreign investors in Indonesia will be abundant in 2000. But they will have to bet on more progress in the bank and debt restructuring fronts or the economy will lack the fundamentals needed for recovery and just keep languishing.

Wahid must take the lead

The Indonesian rupiah, 1999's top-performing currency, may have a tough time edging higher as some of the region's least-experienced leaders tackle some of its worst social and economic problems.

The country, led by President Abdurrahman Wahid, a cleric by training, faces unrest in independent-minded provinces, mounting external debt and pressure to keep the economy growing after a recession last year - its worst in at least three decades.

"It's going to be hellishly difficult to get the economy back on track,' said Simon Mahadevan Flint, a senior currency strategist at Bank of America in Hong Kong. -- Bloomberg

INDONESIA

Head of State: President Abdurrahman Wahid

Population: 204.4 million (1998)

GDP: US$94.2b (1998)

GDP per capita: US$500 (1998)

Strengths: New government and cabinet should bring stability; economy can't go much lower

Unknowns: Increasing calls for independence from provinces; massive financial sector problems persist

(*) Will Dempster is a Jakarta-based journalist.