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Well Done, Jakarta, But Don’t Let Opportunity Slip

By webadmin on 9:44 am December 19, 2011.
Category Archive

Zakir Hussain – Straits Times Indonesia

The past week has been a good one for Indonesia.

First, came the news that it had regained the coveted ‘investment grade’ status for its sovereign debt by Fitch Ratings. A day later, Parliament passed a long-awaited land acquisition law that clears the way for building the necessary roads, rail, ports and other infrastructure to attract more investments.

Two other major ratings agencies, Moody’s and Standard and Poor’s, are widely expected to follow Fitch’s lead next year.

This sudden confluence of happy news has taken a long time coming. The country’s bureaucrats have been quietly laying the ground to recover the BBB-minus credit rating which Indonesia lost during the Asian financial crisis in 1997.

Over the past several years, they have steadily reduced the government’s ratio of debt to gross domestic product, and built up the country’s foreign exchange reserves.

Some have dubbed Indonesia “Asia’s economic jewel”, and not without reason.

After having remained relatively under the radar compared to Asian giants China and India, the continent’s next-most populous country is set to power ahead, with the Organization for Economic Cooperation and Development projecting growth averaging 6.6 percent a year over the next five years.

The World Bank also recently forecast growth of 6.2 percent next year, citing the natural resilience of the Indonesian economy on the back of rising domestic demand. That resilience – that comes from a huge internal market and a growing middle class – allowed the country to emerge unscathed from the global financial crisis two years ago.

Now, to add firepower to its economy, important policies that will have broader and longer-term impact are being implemented.

Last Friday, Parliament passed the land acquisition law that will make it easier for the state to appropriate land to build much-needed infrastructure to accommodate growing domestic travel and reduce the high cost of logistics, the latter being a particular hindrance to business expansion.

A longstanding fuel subsidy that has stretched the state budget will also be slashed from April, with private cars in Java having to pay full price for fuel. This move – which some say should be implemented even earlier as the economy is in good shape – will allow more resources to be reallocated more efficiently to improve the lot of lower-income citizens.

An ongoing tax census aims to broaden the tax base, which will grow as more earn higher incomes.

Indonesian investment official Silmy Karim notes that the country’s investment grade rating means a key restriction for many investors has been lifted. The lending rate to local investors is also likely to be lowered as a reflection of greater confidence in the economy.

The improved rating will, hopefully, see renewed interest in public-private partnerships that the government needs to embark on large-scale projects to repair aging infrastructure and construct new facilities. Jakarta needs to spend some US$220 billion (S$287 billion) on a public infrastructure overhaul by 2014, and is looking to the private sector to pay a substantial share of this.

But this generally upbeat picture has to be tempered by awareness of certain risks. Externally, the euro zone crisis suggests there will not be a swift surge in capital inflows. Internally, significant problems remain for investors and businessmen entering the Indonesian market.

The country’s leaders are well aware of this fact. Last Friday, President Susilo Bambang Yudhoyono acknowledged there was truth to the outstanding issues Fitch had pointed out. These include corruption and a political environment that holds back efforts at reform.

Therein lies the challenge for the country as it powers forward.

For instance, the new land law will not completely do away with resistance to takeovers, especially if its owners feel they are not compensated fairly enough.

Under the new law, land owners who object to the decision to acquire their land or to the compensation value will have their appeals resolved within 74 working days, so projects do not stall. But agrarian and human rights groups have warned that the law could trigger more disputes, particularly in cases involving unclear land ownership rights.

This matter of legal uncertainty is another major bugbear among investors.

It is one underscored by the recent high-profile case involving London-based Churchill Mining. It has threatened to take the country to international arbitration over a dispute with a local company, Nusantara Group. In essence, licenses given to both have led to overlapping claims on mining rights.

Another ongoing dispute that casts doubts on the country’s transparency involves an ongoing scuffle between government agencies and BlackBerry producer RIM.

The authorities have leveled threats at RIM to get it to build a data server in Indonesia. A move to investigate its country head over a stampede at the recent launch of a new smartphone is being seen by many foreigners here as yet another way of putting pressure on the company.

As with any other country, investors eager to pour funds into Indonesia will invariably weigh up the potential rewards against these business risks. But those who are fairly new may think twice about putting their time and money here, if these grey areas are not dealt with soon enough.

There is another incentive for government agencies to get their act together: The country is still performing below its full growth potential, which some analysts have said ought to be 7 percent to 8 percent.

If Indonesia wants to move higher up the rungs, it needs to do much more to minimize risks that are, at the end of the day, man-made.

As the World Bank said in a statement last Friday: ‘Indonesia’s return to investment grade will hopefully encourage much needed long-term investment in infrastructure and increased regulatory certainty and transparency that are critical for job creation and more inclusive growth.’

Indonesian officials’ hard work has paid off with the Fitch upgrade. It will be a great pity – and a missed opportunity for the region – if this validation does not act as a spur for them to do much more.

Reprinted courtesy of Straits Times Indonesia. To subscribe to
Straits Times Indonesia and/or the Jakarta Globe call 021 2553 5055.

Email This Page

Well Done, Jakarta, But Don’t Let Opportunity Slip

By webadmin on 9:44 am December 19, 2011.
Category Archive

Zakir Hussain – Straits Times Indonesia

The past week has been a good one for Indonesia.

First, came the news that it had regained the coveted ‘investment grade’ status for its sovereign debt by Fitch Ratings. A day later, Parliament passed a long-awaited land acquisition law that clears the way for building the necessary roads, rail, ports and other infrastructure to attract more investments.

Two other major ratings agencies, Moody’s and Standard and Poor’s, are widely expected to follow Fitch’s lead next year.

This sudden confluence of happy news has taken a long time coming. The country’s bureaucrats have been quietly laying the ground to recover the BBB-minus credit rating which Indonesia lost during the Asian financial crisis in 1997.

Over the past several years, they have steadily reduced the government’s ratio of debt to gross domestic product, and built up the country’s foreign exchange reserves.

Some have dubbed Indonesia “Asia’s economic jewel”, and not without reason.

After having remained relatively under the radar compared to Asian giants China and India, the continent’s next-most populous country is set to power ahead, with the Organization for Economic Cooperation and Development projecting growth averaging 6.6 percent a year over the next five years.

The World Bank also recently forecast growth of 6.2 percent next year, citing the natural resilience of the Indonesian economy on the back of rising domestic demand. That resilience – that comes from a huge internal market and a growing middle class – allowed the country to emerge unscathed from the global financial crisis two years ago.

Now, to add firepower to its economy, important policies that will have broader and longer-term impact are being implemented.

Last Friday, Parliament passed the land acquisition law that will make it easier for the state to appropriate land to build much-needed infrastructure to accommodate growing domestic travel and reduce the high cost of logistics, the latter being a particular hindrance to business expansion.

A longstanding fuel subsidy that has stretched the state budget will also be slashed from April, with private cars in Java having to pay full price for fuel. This move – which some say should be implemented even earlier as the economy is in good shape – will allow more resources to be reallocated more efficiently to improve the lot of lower-income citizens.

An ongoing tax census aims to broaden the tax base, which will grow as more earn higher incomes.

Indonesian investment official Silmy Karim notes that the country’s investment grade rating means a key restriction for many investors has been lifted. The lending rate to local investors is also likely to be lowered as a reflection of greater confidence in the economy.

The improved rating will, hopefully, see renewed interest in public-private partnerships that the government needs to embark on large-scale projects to repair aging infrastructure and construct new facilities. Jakarta needs to spend some US$220 billion (S$287 billion) on a public infrastructure overhaul by 2014, and is looking to the private sector to pay a substantial share of this.

But this generally upbeat picture has to be tempered by awareness of certain risks. Externally, the euro zone crisis suggests there will not be a swift surge in capital inflows. Internally, significant problems remain for investors and businessmen entering the Indonesian market.

The country’s leaders are well aware of this fact. Last Friday, President Susilo Bambang Yudhoyono acknowledged there was truth to the outstanding issues Fitch had pointed out. These include corruption and a political environment that holds back efforts at reform.

Therein lies the challenge for the country as it powers forward.

For instance, the new land law will not completely do away with resistance to takeovers, especially if its owners feel they are not compensated fairly enough.

Under the new law, land owners who object to the decision to acquire their land or to the compensation value will have their appeals resolved within 74 working days, so projects do not stall. But agrarian and human rights groups have warned that the law could trigger more disputes, particularly in cases involving unclear land ownership rights.

This matter of legal uncertainty is another major bugbear among investors.

It is one underscored by the recent high-profile case involving London-based Churchill Mining. It has threatened to take the country to international arbitration over a dispute with a local company, Nusantara Group. In essence, licenses given to both have led to overlapping claims on mining rights.

Another ongoing dispute that casts doubts on the country’s transparency involves an ongoing scuffle between government agencies and BlackBerry producer RIM.

The authorities have leveled threats at RIM to get it to build a data server in Indonesia. A move to investigate its country head over a stampede at the recent launch of a new smartphone is being seen by many foreigners here as yet another way of putting pressure on the company.

As with any other country, investors eager to pour funds into Indonesia will invariably weigh up the potential rewards against these business risks. But those who are fairly new may think twice about putting their time and money here, if these grey areas are not dealt with soon enough.

There is another incentive for government agencies to get their act together: The country is still performing below its full growth potential, which some analysts have said ought to be 7 percent to 8 percent.

If Indonesia wants to move higher up the rungs, it needs to do much more to minimize risks that are, at the end of the day, man-made.

As the World Bank said in a statement last Friday: ‘Indonesia’s return to investment grade will hopefully encourage much needed long-term investment in infrastructure and increased regulatory certainty and transparency that are critical for job creation and more inclusive growth.’

Indonesian officials’ hard work has paid off with the Fitch upgrade. It will be a great pity – and a missed opportunity for the region – if this validation does not act as a spur for them to do much more.

Reprinted courtesy of Straits Times Indonesia. To subscribe to
Straits Times Indonesia and/or the Jakarta Globe call 021 2553 5055.

Email This Page