Asiamoney, May 2009

It’s a strange state of affairs when Indonesia stands out in the region for the positive sentiment around it. Wracked for 10 years by financial crisis, banking collapses, wild currency runs and crippling infrastructure deficiencies, Indonesia has for a long time been a story of unrealised potential. But now, as one Jakarta banker puts it, others in the region are “pissed off we’re so happy”.

Should they be happy? On paper, there’s not a lot to suggest so. Most analysts expect a fall from 2008’s roughly 6.5% GDP growth to between 3 and 4% in 2009, with the manufacturing sector entering recession. External debt stands at $149.1 billion, according to Bank Indonesia – almost three times reserves of $50.5 billion – while short-term private external debt is $22.6 billion, according to HSBC, at a time when rolling over of debt has scarcely ever been more difficult. A small bank, IFI, went under in April and other small banks look vulnerable, and as for the infrastructure, there’s been no visible improvement.

So why the positive mood in Jakarta? On one level, it’s all relative. William Wallace, the lead economist at the World Bank in Jakarta, uses this joke as an analogy. “There are two guys who go hiking. One says: ‘I’m going for a run this morning. I want to be in good shape in case we meet a bear.’ The other says: ‘You can’t outrun a bear!’ The first says: ‘I don’t have to outrun a bear, I have to outrun you.’” In an environment like this, when neighbouring countries grapple with full recessions and political instability, it’s increasingly easy to outrun the other guy, if not the bear, without actually doing anything special. 3.5% growth in 2009 looks miserable compared to 6.5% in 2008 but considerably better than -5% in Singapore. Gross exports only account for about 30% of Indonesia’s GDP (and net exports barely 1%), compared to over 60% in other nations like Malaysia; since it is therefore a domestic demand story, it is much better insulated against global slowdown than some if its peers. “It’s still the third fastest growing economy in Asia,” after China and India, says Ferry Wong, head of research at Macquarie Capital Securities.

Similarly, the relatively orderly process of Indonesia’s recent legislative elections looks considerably better than, say, the bullet-ridden car of Thai political protest leaders. Indonesia’s is one of the world’s largest democracies and a young one at that, so the progress of this year’s elections – the legislative ones in early April will be followed by a presidential poll in July – is exceptionally important. There has, in fact, been much criticism of the administration of the election, with widespread disenfranchisement of many eligible Indonesians, but since it does not seem to have been targeted at supporters of any one party it so far seems to have been tolerated peacefully. “It has been an equal opportunity disenfranchisement,” says one observer, tongue in cheek. “Everyone who was going to vote for whoever was disenfranchised equally.”

Although results were still being tabulated as Asiamoney went to press, it appeared that president Susilo Bambang Yudhoyono, who became president in 2004, had enjoyed a much stronger showing from his party and would therefore be likely to win the presidential vote comfortably in July. This has a number of consequences for Indonesia: by giving him greater support it theoretically makes him less beholden to the wishes of other coalition parties; this in turn ought to give him greater freedom to appoint ministers, who have been exceptionally varied in quality during his tenure; it also gives him more power to pursue reformist agendas, from the judiciary and the general investment environment to problematic local areas such as health and agriculture.

Since he is perceived to have been successful in areas including the economy, customs, tax collection and police department reform, there is hope that with the right people he can succeed in other areas too. “If he gets re-elected, policies will pass through parliament in a more swift manner,” says Helmi Arman, economist at Bank Danamon. Markets and foreign interest have both responded very positively to this likelihood. And as a separate issue, as Tigor Siahaan, managing director and country business manager for Citi in Indonesia, points out, elections generate a lot of revenue in their own right. “There are about 12,000 people who are running as candidates,” he says, all of them spending big on everything from banners to travel. He adds: “There is nothing but upside on the political front.”

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