Hong Kong – Megawati Sukarnoputri may well put Indonesia on the path to political stability, but even then it may not be smooth enough to tempt back emerging market investors whose sentiment is soured by external volatility.
"The external environment is so difficult for emerging markets it is really imposing limits on what they can deliver on economy," Sean Darby, head of Asian equity strategy at Dresdner Kleinwort Wasserstein in Hong Kong, told Reuters. "Even though there's a change of leader, their destiny probably isn't under their control at the moment," he said.
The hugely popular Megawati was named President of the world's fourth most populous country on Monday, replacing Abdurrahman Wahid after he was sacked for incompetence by Indonesia's top political assembly.
Daughter of the nation's founding father, Sukarno, and head of the biggest party in the Indonesian parliament, Megawati is seen by many among the country's 210 million people as the person best positioned to return stability to the strife-torn country.
But popularity alone is insufficient to steer a steadily improving course for impoverished Indonesia, as global volatility sparked by a financial crisis in Argentina has plunged emerging market assets into their worst turmoil in three years.
This has struck at the same time as economists have pared down their estimates for US economic growth this year and pushed back their forecasts for a recovery further into 2002. "Indonesia still has a big issue with external funding at a time when the sovereign financial markets are very delicate, particularly towards lower rated countries," Darby said.
Indonesia is the worst-rated economy in Asia, downgraded to CCC-plus in May by Standard & Poor's because of its inadequate fiscal adjustment, political instability, institutional weakness and heavy public indebtedness, among other factors. At best, the political instability may be on the brink of resolution, but that leaves plenty for the country's new leader to tackle and a population whose patience is wearing thin.
Core problems remain
"Short term there's probably more upside for currency, but the reality is that the core problems are still there. The outlook for the next three to six months is tough," Nicholas Bibby, regional economist at UBS Warburg in Hong Kong, said.
The enormity of the task ahead was sinking into Indonesian markets on Tuesday after rallying sharply in expectation of a change at the top on Monday.
The Jakarta stock market (JKSE) gave back all the gains it had made the previous day, a 55 basis point rally on bond spreads petered out and the battered rupiah currency gave up the fight at the 9,900 rupiah level to the dollar after gaining about 10 percent as it spurted to four month highs.
The country's dollar bonds are the worst performing in Asia this year as is the currency, excluding Japan's yen, while stocks have seen portfolio inflows evaporate. "The new government is going to have to address the faults of the banking sector, issues of corporate governance and also the disposal of [state controlled] assets," Bibby said.
Those are key factors in rebuilding Indonesia's relationship with the International Monetary Fund, which is vital to Paris Club lenders rolling over the country's debts, which in turn will serve to underpin the confident return of foreign investors.
"A stable political environment is certainly the best thing for an improvement in the economy," Craig Chan, financial markets economist at ING Barings in Hong Kong said. "What we need to see now is the appointment of a vice president and finance minister who can help create the stability that Megawati and Indonesia clearly need," he said.
The reduced political risk premium on Indonesia and the expectation of a resumption of IMF lending should help the central bank ease interest rates which have been on an upward trend.
But even that will not turn Indonesia into Asia's investment outperformer while regional currencies are trending weaker against the US dollar and stock markets sag lower. "The biggest problem is that Indonesia is just not on the radar screens.
Even if we saw a sharp upward movement, it's not the sort of market where people would feel they had missed the boat. It would have to go on a lot longer for that to happen," Dresdner's Darby said.