Sunday, April 29, 2012

Indonesia: the East's waking giant

IN the gleaming towers around the Jakarta stock exchange, all is air-conditioned hush, boutiques and coffee shops where young men and women sit tapping at their smartphones. 

Outside, the steaming street life of the city hits as hard as the heat: grim traffic jams, hustling vendors, the haunting call from the minarets, a pall of pollution and legions of police and security guards checking cars for bombs.

Both are the story of Indonesia, 14 years after it ousted its dictator, Suharto, amid street battles, smoke and gunfire that gave way to a turbulent, yet enduring, democracy in the most populous Muslim nation on earth.

"This is a young country with a median age of just 29," said Poltak Hotradero, a research analyst at IDX, the stock exchange operator, "and for teenage kids like my daughter, it's a different country from 1998."

Then the stock market index languished at about 400 and $US1 bought 16,000 rupiah. Today the index is touching record highs of about 4,000 and the dollar buys 9,190 rupiah.

"Even in the bad times, growth was 4 per cent, and now that there is no political turmoil we are growing at 6.5 per cent," said Dandossi Matram, finance director of a state-owned investment company, PT Rajawali Nusantara. "It proved that the minimum growth was 4 per cent. And where did it come from? Consumption. This market is huge."

The lure of a market of 240m people, rich in natural resources, is why David Cameron led a British business delegation here this month.

Alan Richards, chief executive of HSBC in Jakarta, said: "The major themes of the shift in economic power from west to east, south-to- south trade and the rising tigers are perhaps best demonstrated in Indonesia."

The bond markets endorsed that view recently when Indonesia sold $US2billion of 10-year dollar-denominated bonds at a yield of 3.85 per cent in a sale that was three times oversubscribed. That came after the Moody's and Fitch ratings agencies raised the country's status to investment grade.

Indonesia is typical of the "new growth" economies identified in Ruchir Sharma's Breakout Nations: In Search of the Next Economic Miracle.

Foreign investors have found that business success does not come easily in a subtle, complex society where Javanese courtliness masks predatory practices among the elite.

Suharto may have gone to his grave peacefully but his cronies live on. They dominate key sectors of the economy and play by rules set decades ago by a handful of insiders.

The highest profile casualty of this culture clash is Nat Rothschild, the financier.

Rothschild came to inspect the huge coal resources controlled by the Bakrie family, who were wily powerbrokers under Suharto and well known in the Asian markets for their agile financial engineering.

To the amazement of the Jakarta investment community, he struck a deal to bring them to the London stock market in a partnership that was christened Bumi plc.

His stated aim was to acquire stakes in natural resources in emerging markets, improve corporate governance and deliver the credibility of a London listing. It didn't work out that way.
Last week Bumi was dealing with its second share price collapse in six months, which led to the breach of covenants on a $US437m loan to the Bakries.

The company flirted with disaster last northern autumn, when the Bakries avoided a $US1.3bn default by selling part of their stake to a big Indonesian investor, Samin Tan. He replaced Rothschild as co-chairman.

The boardroom battles then became embarrassingly public with the leak of a letter from Rothschild criticising the refinancing of a dollars 600m loan from the China Investment Corporation, which is controlled by the Beijing government.

Some investors felt Rothschild was rather belated in noting that the Bakrie-linked venture traded at a "corporate governance discount" to the rest of the Indonesian coal mining sector.

"It's amazing how stupid arrogant people can be," said John Arnold, founding chairman of the British Chamber of Commerce in Jakarta and a veteran of three decades of blue-chip accountancy and consulting there.

Rothschild may have retired from the spotlight but Aburizal Bakrie, the scion of the dynasty, is heading straight into it: he is campaigning to be president of Indonesia in 2014 at the head of Golkar, the old Suharto political party.

If the Rothschild saga is seen by some in Jakarta as a comedy of errors, most foreign investors agree that what has happened to a small London-listed company, Churchill Mining, is tragic.

Once again, the story involves coal, which has turned into black gold for Indonesia. It is the world's largest exporter of thermal coal, with output this year estimated at 390m tonnes and it sits on 40 per cent of world reserves near to eager customers in China and India.

Churchill thought it had got the rights to develop a site of 135 square miles in Kalimantan, the Indonesian part of Borneo, containing up to 2.8billion tonnes of coal and worth up to $US3bn.

But the company said that when its exploration revealed the extent of the field, the original Indonesian licence holders reappeared on the scene. They are said to include politically well-connected players, including Suharto's son-in-law, Prabowo Subianto.

The local government swiftly awarded them extensions to their licences, setting off a four-year legal battle that ended with defeat for Churchill before the Supreme Court in a hearing that diplomatic observers described as "brief".

Now Churchill's executive chairman, David Quinlivan, is taking Indonesia to an international court of arbitration seeking $US2bn.

The company said it was "a clear-cut example of an asset grab": "Churchill Mining's experience will for a long time serve as a black mark and a stark warning to investors about the risks that continue to exist in Indonesia."

The case was raised by Cameron in talks with President Susilo Bambang Yudhoyono, who has made reform a keynote of his second term in office and who will be the guest of the Queen on a state visit this year.

Corruption scandals have beset the president's party but the former general enjoys a high reputation among Indonesians, although even his political allies say he is indecisive. The government recently backed down on reforms to the country's expensive fuel subsidies after riots and demonstrations.

Companies complain that democracy has not eliminated corruption in Indonesia, merely multiplied the actors as local officials demand a slice of the action.

For investors, the good news is that democratic politics have produced moderate coalitions, isolated Islamic extremists and weathered terrorist attacks.

The bad news is that while businesses are calling for strong leadership, none of the candidates for the 2014 election looks able to deliver it.

All agree that Indonesia desperately needs to invest in infrastructure to replace worn-out roads, ports and airports, to build railways and make its cities more livable.

"If the government succeeds in implementing the infrastructure projects, then in 2020 we are going to be growing by 10 per cent or 11 per cent a year," said Achmad Reza Widjaja, chief economist at PT Bumi Resources, a Bakrie group company.

"The big problem now is the logistics and distribution in a big archipelago country like this," he said, referring to Indonesia's 13,000 islands scattered along the equator.

The key to success, say longtime business people like Arnold, is to get into sectors such as finance, retail and services and to stay away from anything, like resources, which is prey to local rent-seekers.

Kosmian Pudjiadi, a property developer, declared: "I am optimistic. In Indonesia, you can't use standard economic theory. The biggest demand is in the middle income sector. In our last development, only 5 per cent of the buyers had mortgages."
by: MICHAEL SHERIDAN From: The Australian

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