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Indonesia Faces Crisis

Indonesian President Abdurrahman Wahid. Photo by Associated Press.

Sees economic and foreign investment impact

By Ron Chepesiuk

When Indonesia’s President Abdurrahman Wahid took office in October 1999, he faced the formidable tasks of trying to establish democracy, curtail rampant corruption, revive the economy — and quiet the separatist violence that has been tearing the country’s ethnic fabric. Nearly 18 months later, Wahid has had little success and is struggling to survive politically, as public confidence in him dwindles.

“The Indonesian political situation has actually improved in a few ways since Wahid came to power,” explained Dana Dillon, policy analyst for South and Southeast Asia at the Heritage Foundation, a think tank based in Washington, D.C. “There has been more openness in the government, and he’s managed to curb some of the military’s power.”

But Dillon added: “In terms of managing the country, Wahid has been incompetent.”

Recent developments, in fact, suggest that it’s been business as usual for Indonesian politics during Wahid’s tenure. The president promised he would clean up corruption left by former President Suharto, but he has managed to convict only one person, Suharto’s son Tommy, and even he has escaped punishment.

Then last January, a parliamentary report implicated the president in the embezzlement of $3.7 million from the funds of a state food distribution agency and for receiving $2 million from the Sultan of Brunei, an oil rich island state.

To help defuse public outrage, Wahid went on public television, á la Bill Clinton. “All this information from the two cases is not true,” he told the Indonesian people. “I am not involved.”

Although no evidence has surfaced to prove that Wahid has stolen from the people, the Indonesian parliament censured him on Feb. 1 and indicated that it was considering impeachment.

The political process has suffered from instability in the Wahid administration, said Chris Rush, who investigates the political and economic climates internationally for business clients through his White Plains, N.Y.-based company Chris Rush and Associates.

“He has hired and fired a number of ministers,” Rush said. “The lack of continuity has made it difficult to develop and implement policy.”

A Society in Chaos

Serious ethnic and political divisions continue to plague the country. On Feb. 5 thousands of Wahid supporters attacked a college campus and burned the offices of political opponents, who want to hasten Wahid’s impeachment over the corruption scandal. Later that month, ethnic violence broke out in Central Kalimantan, where native Dayaks slaughtered over 400 Madurese immigrants.

Tension began 40 years ago, when the Indonesian government began re-settling thousands of people from the island of Madura, the Indonesian part of Borneo island, hoping to relieve congestion by redistributing the population.

Rising separatist and ethnic violence raises the specter of further upheaval in the world’s fourth-most-populous country. Many fear Indonesia will experience a repeat of the turmoil experienced during the fall of President Suharto in 1998.

It also raises concerns among foreign businessmen.

“The foreign investor community is waiting for a signal from the Indonesian government, that will show it’s willing to work with foreign creditors to get the economy back on its feet,” said Mohammed El-Erian, marketing director of Pimco, an investment management company based in Newport Beach, Calif. “[Foreign] investors … want to see a road map that shows some progress is being made.”

Surprisingly, the economy appears to be rebounding. Indonesia’s trade surplus, for example, jumped 15.4 percent in 2000 to $28.47 billion, while the economy for the year registered a gross-domestic-product growth rate of 4.8 percent, faster than the 3 percent forecast earlier.

Furthermore, last December Indonesia’s Central Bureau of Statistics reported that the value of the country’s exports during the January-December period in 2000 reached $51.6 billion, which was 29.9 percent higher than in the same period last year. Meanwhile, imports increased by 27.85 percent.

And in some sectors, sales have been booming. In the first 11 months of 2000, new vehicle sales jumped from 78,602 units sold in 1999 to 274,864, a 250 percent increase.

Long-Term Economic Outlook

But statistics can deceive.

“In the short term, the economy certainly looks healthy,” said Hilton Root, director of global studies at the Milkin Institute, a Santa Monica, Calif.-based think tank. “Exports and sales are up, but, in the long term, the economic picture is definitely not good.”

The big problem, Root said, is giant conglomerates established during the Suharto regime.

“Those conglomerates are inefficient and a lot of them sell things nobody wants,” he explained. “It’s important for Indonesia’s economic future that new companies emerge to produce more desirable products for sale.”

Furthermore, Dillon added that the growth figures are misleading.

“Most of the growth has to do with the price of oil, because Indonesia is a major exporter of oil,” he explained. “It has really nothing to do with the country’s ability to produce goods and services.”

Last December, the Bank of Jakarta released the results of a survey conducted the previous month, which showed consumer and manufacturer confidence in the economy’s future was low. The respondents expected prices to increase in the next six to 12 months, and most weren’t planning to purchase consumer goods, particularly big items such as homes and cars. In addition to rising prices, survey respondents revealed a lack of confidence in the government’s economic plan for recovery and the weakening exchange rate of the rupia (Indonesia’s currency) to the U.S. dollar. The survey also showed that businesses were wary about making new investments.

Though the media reported that foreign investors lack confidence in the Indonesian economy as well, that isn’t entirely true, Root said.

“The Chinese, Koreans and Japanese are buying up everything they can in Indonesia because they know that the prices will never be better,” he said. “Unfortunately, that’s not true for Americans. All the Americans do is lecture and chastise Indonesia. Instead, they should be trying to help the country. Why don’t they go there and help to restructure the assets, and rebuild the country?”

Will It Pay Off?

Investing in Indonesia has risks, however.

“People investing 5 to 10 million in a country want to know their money is safe and that it will not be taken by sovereign intervention,” Rush said. “I can’t guarantee my clients that will be the case, given the country’s history. The legal system, in particular, is tough to deal with unless you have the best possible legal advice and you know what you’re getting yourself into.’

What can happen to a foreign company doing business in Indonesia is well illustrated by the recent troubles of Manulife, a Canadian life insurance company that is the largest foreign insurer in Indonesia. On Oct. 27, Manulife bought 40 percent of Asuransi Jiwa Manulife Indonesia in an Indonesian government-approved deal worth $20 million. The agreement raised Manulife’s stake in the joint venture to 91 percent.

But when the police began an investigation of the deal, they interrogated Manulife’s vice president and barred him from leaving the country. The investigation followed a claim by Roman Gold Assets, a British Virgin Island-based company, that it had bought the same 40 percent stake one week before Manulife did. However, nobody could determine who the controlling share holder of Roman Gold Assets was.

Manulife appealed to government officials for help in getting its vice president released. The country’s attorney general reportedly told Manulife that he was “sympathetic but unable to help.” Meanwhile, the Indonesian Commercial Court froze the $20 million paid by Manulife to consummate the agreement.

“The Manulife situation is the perfect example of why investors need to be on top of their game when investing in countries that have fragmented political and judicial systems, such as the conditions that now exist in Indonesia,” Rush said. “Most importantly, companies need to conduct comprehensive … investigations into the background and prior histories of potential partners.”

Nevertheless, many maintain Indonesia has potential. With good leadership and the right economic programs in place, the country could become another Asian tiger. In the meantime, investors are advised to enter the Indonesian marketplace with caution.

“Investors need to closely examine the region in which they are thinking of making an investment,” Rush said. “Have good legal advice to protect yourself and make sure you review the rules and regulations carefully. Indonesia is a great place to make an investment, if you are careful.”