Olivia Rondonuwu & Neil Chatterjee, Jakarta – Indonesia's selection of less aggressive candidates to head antigraft institutions and failure to make progress on big corruption cases show its drive to reduce graft has faltered – but that is doing little to deter foreign investors.
President Susilo Bambang Yudhoyono attracted voter support and increased investor confidence last year on hopes he would make further progress in his second term in reforming graft-ridden institutions in one of Asia's most corrupt countries.
But the continued depth of the problem has been highlighted in recent months by the success of vested interests in weakening Corruption Eradication Commission (KPK), and by revelations of allegedly corrupt tax official Gayus Tambunan who bribed his way his way out of prison.
Analysts say Yudhoyono is unlikely to achieve much reform of corrupt legal or tax systems that increase risk for investors, but impressive stability in managing Indonesia's finances and strong economic growth will draw further portfolio and foreign direct investment.
"When you weigh up the risk factors, the opportunities in Indonesia are a lot greater. While there is corruption, actually there is corruption everywhere," said Julia Goh, an economist at Malaysian bank CIMB, whose Indonesian subsidiary saw third quarter profits jump 46 percent and its shares triple in 2010.
Fund managers say corporate governance is the biggest risk for equity investors, but that has not stopped a 41 percent rally in Jakarta stocks to record highs this year. An exception was top coal miner Bumi Resources, whose stock slumped about 30 percent by mid-year on concerns over governance and high debt, but that was seen as a buying opportunity despite the risks and the stock has rebounded.
"It will always be an issue. Over the last year or two markets have been less focused on the corruption issue because of the favorable environment," said Chua Hak Bin, director of global research at Bank of America Merrill Lynch in Singapore.
"This issue may come back to haunt – it's probably a bit worrying that investors have been willing to push it aside, not just corruption but other reforms, and as valuations get higher investors may get more demanding."
While corruption acts as a drag on the economy, booming exports of commodities such as coal and rising consumer spending mean solid six percent growth is expected again next year.
For bond investors, who have piled into government debt to drive down 20-year yields by 1.45 percentage points this year, this growth plus falling government debt levels and the prospect of a ratings upgrade to investment grade status next year are likely to outweigh any graft risk.
Corruption has not stopped the government's finances from improving and so long as it does not hit the currency or lead to a political backlash, it may continue to be overlooked by investors with a short time horizon, Chua said.
Just PR?
Criticism of the government's progress has been rising. The Indonesian public's perception of Yudhoyono's battle on graft, on a 0-100 scale, slid to 34 in October from 84 a year earlier, a poll by the Indonesia Survey Institute showed.
The KPK, which had achieved some success and struck fear into government officials since being set up in 2003 with jail sentences for "untouchables" such as members of parliament, an in-law of the president and a former central bank governor, saw its leader convicted this year for 18 years on murder charges.
Two KPK deputies had graft charges against them dropped after evidence they were framed by police, prosecutors from the Attorney General's Office and a businessman whose brother was a KPK target, but they could still face prosecution.
The weakened body has since been aiming to take on smaller regional cases than going for big fish in Jakarta, according to anti-graft watchdog Indonesia Corruption Watch.
Campaigners hoped a new KPK chief would revitalise efforts, but the choice last month of softly spoken academic Busjro Muqoddas by the House of Represenatives (DPR) – fearful of further convictions of parliamentarians – left many disappointed.
This was followed up by Yudhoyono's choice of a former deputy attorney general to become a new attorney general, leading to even more dismay, as an insider from an institution widely considered corrupt was not seen as likely to clean it up.
"Indonesia has no priority nor road map, and probably doesn't want any significant change. The corruption fight is being done at the periphery to appease the public," said Teten Masduki, of anti-graft group Transparency International Indonesia.
Transparency International's 2010 corruption perception index for Indonesia stood at a score of 2.8 for 2010, the same as last year, and a worse rating in its scale of 0 to 10 than Thailand's 3.5 and Malaysia's 4.4.
"In business you need to build relationships of trust and support. But here it feels like everyone is opportunistic, trying to get something out of everything you do," said the foreign head of an IT firm. "You cannot work well like this."
The central bank told Reuters the risks for doing business were seen as the biggest obstacle to an investment grade rating.
Money opens doors
Pessimism among the public has turned to anger after the revelations of junior tax officer Gayus Tambunan, being tried for bribing a judge to avoid charges of taking millions in payments from firms to slash their tax bills.
Photographers spotted Tambunan sporting a wig at a tennis tournament on the resort island of Bali – when he was meant to be in jail. It turned out he had bribed the jail's head warden to slip out of the prison's doors more than 60 times and told a court it was a common practice his cellmates also did.
The grim picture of entrenched corruption has for years put firms off from investing directly, but FDI has grown a third to about $14 billion in 2010, from existing mining firms and manufacturing newcomers, with more seen coming from North Asia to tap buoyant consumer demand and abundant mineral resources.
While some nations may be willing to deal with graft, there are also signs more Western firms are willing to take on the risks in Indonesia, which has had success in tackling other threats such as Islamic militant groups and currency volatility.
The world's biggest food group Nestle said this month it will invest in a new plant to produce Milo to meet growing local demand, while the government says US equipment maker Caterpillar Inc is considering making Indonesia its Southeast Asian production base.
Executives said they had learned to work around the problem. "It adds time and complexity. Who needs to be paid what, it's such a complex situation. Every way you turn someone else must be paid," said a managing director of a Western software firm, who declined to be identified given the sensitivity. "Thankfully we don't deal with it directly, we use other people for that. We cannot be seen to be engaged with anything like that."