Saturday, February 6, 2010

Indonesia’s Political climate spooks investors

Fears about fallout from political squabbling may affect inflow of dollars
JAKARTA: If two recent reports are anything to go by, offshore investors are beginning to temper their bullishness about Indonesia's growth prospects with some measure of doubt. On Thursday, Reuters quoted a senior manager at JP Morgan Asset Management's Hong Kong office as saying that it could sell its Indonesian shares in the short term due to political tensions.

'Indonesia is a long-term domestic growth story, but we may take profits in the short term as increasing political noises can potentially delay projects,' its vice-president of investment services, Ms Grace Tam, was quoted as saying.

Separately, the head of research at the Jakarta-based Bahana Securities, Mr Harry Su, recounted in The Jakarta Post that he had faced a barrage of questions about Indonesia's 'deteriorating political landscape' in recent meetings with fund managers in Hong Kong and Singapore. To The Straits Times yesterday, Mr Su said: 'I have never seen this kind of interest or got as many questions on the political front since 1998 and 1999.'

Indonesia was rocked by political and economic turmoil after the 1997 Asian financial crisis caused massive unemployment and food shortages. Violent riots erupted in major cities, eventually leading to the resignation of strongman Suharto in May 1998. Fund managers have indicated that they could exit the Indonesian market by June on the back of a likely hike in interest rates due to rising inflation, which would then dampen growth. So, a possible stock market correction later this year cannot be interpreted as a sign of trouble.

Nevertheless, the growing skittishness about the risk of fallout from Indonesia's political situation should not be taken lightly, said Mr Su. After all, these views will have a long-term bearing on foreign dollars flowing into the country.

Indonesian President Susilo Bambang Yudhoyono recently tasked his foreign envoys based overseas to woo investments from China, the United States and countries in Europe and the Middle East.

Yet at home, two respected reformists in his Cabinet - Vice-President Boediono and Finance Minister Sri Mulyani Indrawati - are facing flak for defending their decision to bail out the private Bank Century in 2008. Critics have labelled the move a misuse of state funds. A parliamentary inquiry is ongoing but rising tensions within Dr Yudhoyono's coalition could drag out the inquiry and, in a worst-case scenario, lead to the loss of both Cabinet ministers.

More immediately, the tension between Golkar - which seems to be moving steadily towards the opposition - and Dr Yudhoyono's Democratic Party could also impede the passing of laws on economic reforms like electricity tariff hikes or labour law revisions, Jakarta-based analyst Kevin O'Rourke said in his Reformasi Weekly newsletter.

Indonesia watchers have the example of Thailand at the back of their minds. In the past four years, its protracted political stalemate, street protests and civil unrest dented economic progress and the confidence of investors.

Hopefully, the same scenario will not play out in Indonesia. There are grounds to believe that it could hit moderate growth of 5 per cent to 5.5 per cent this year, and more in the years to come if the government ups its game. After all, it has not done too bad a job in its first 100 days, despite the barrage of media reports complaining otherwise.

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