APSN Banner

Investors give vote of confidence

Source
Wall Street Journal - June 9, 1999

Jay Solomon, Jakarta – Investors are registering a major vote of confidence in Indonesia's freest election in nearly a half century.

The stock market rose 12% Tuesday, the International Monetary Fund approved $450 million in aid, and local businessmen talked optimistically of restructuring debt-laden companies in a more-stable political environment.

"Political stability is the only chance for companies to survive, and the first major hurdle was cleared" in Monday's parliamentary election, said Indra Widjaja, president-director of PT Bank Internasional Indonesia, one of the largest private banks in the nation. "Interest rates and the currency should stabilize as political risk subsides."

Business investments in Indonesia have largely been put on hold in the months heading into the parliamentary vote. The rioting that swept the country last year – and forced former President Suharto's resignation – remained fresh in people's minds, and the assumption was that politics, combined with simmering ethnic and religious tensions, would set off another round of unrest during the campaign. Foreign-investment approvals plunged nearly 90% in the first 10 weeks of 1999, compared with the year earlier.

But the euphoric three-week campaign period ended up looking more like a rock concert than a war zone – large-scale unrest never materialized. Monday's voting was calm and orderly.

Concerned about stability

Financial markets responded. Jakarta's key stock index rose 12% Tuesday to a 22-month high, while the nation's currency, the rupiah, has strengthened 5.6% since Friday, trading late Tuesday in Asia at 7,660 rupiah to the dollar. Traders said the market gains were fueled by "panic buying" driven by a perception that the political risks long associated with Indonesia were abating.

"It's all about country risk in Indonesia, and with the election over this risk subsides," said the Singapore-based trading chief at a US brokerage house. "People are not overly concerned about who's in charge of the country – only that it's stable."

The IMF also placed its stamp of approval on the election by endorsing the $450 million loan late Monday in the US. While the fund never explicitly said it was withholding loans to Indonesia until after the election – as the World Bank did – it did delay a meeting that could have seen the funds disbursed earlier. Many observers saw this as the IMF pressing President B.J. Habibie's government for a free and fair vote.

Recovery outlook

Stanley Fischer, the first deputy managing director at the IMF, voiced optimism Monday in Washington over Indonesia's prospects for economic recovery. "With inflation falling and the exchange rate stable, there is room to reduce interest rates further, thus improving prospects for recovery," Mr. Fischer said. The IMF official also said Indonesia's economic growth was likely to become positive by the end of the year, while inflation would fall to single digits.

But many financial analysts still are cautious about Indonesia. On the corporate side, they say that many Indonesian companies remain insolvent because of the combination of a weak rupiah and billions of dollars of debt. Although interest rates have been falling – one-month central-bank paper is now yielding 25%, down from 40% earlier in the year – it is still too expensive for most companies to raise financing.

The idea that Jakarta's main index, now at 687, is within striking distance of its precrisis high of 740, hit in July 1997, is a portent of an overcooked market, they warn. "The prices can't hold from a fundamental point of view," said economist Neil Saker of SG Securities in Singapore.

Some observers warn that there could still be political tension ahead, despite the success of the actual vote. A fractious coalition government could emerge, making implementation of painful economic reforms all the more difficult.

'Very significant event'

But Indonesian businessmen still say the peaceful vote is significantly improving the investment climate.

Harun Hajadi, managing director of PT Ciputra, a major Indonesian property firm, said his attempts to restructure the company have been undercut by political risk over the past year. Foreign investors he courted balked because of perceived political and social risks; those who did consider projects demanded exorbitantly high returns. Sales of Ciputra's private homes fell 70% from precrisis levels, to 3,000 units last year, as soaring interest rates killed off consumer demand, Mr. Harun said.

But now he sees his business fortunes improving, mainly as a result of falling interest rates. "The peacfulness of the election was a very significant event," he said.

Mr. Widjaja of Bank Internasional Indonesia, who is in the process of recapitalizing the bank, also said the calm will help him, too. Indonesian banks have been crushed by negative spreads – which means they pay borrowers higher rates than they earn from deposits. "This situation should improve" as a result of the vote, he said.

Perhaps most importantly, the peaceful votes could woo back Indonesia's ethnic-Chinese business class, whose shops and homes bore the brunt of much of last year's violence. Though the memories of last May's rioting remains fresh in their minds, and some continue to keep their families overseas for security reasons, many say they feel the security situation in the country is starting to improve.

"During the past year I lost half of all I owned," said Richard Hakim, an ethnic Chinese businessman who owns the toiletries producer PT Kintamolek Masa. "Things can only get better."

Country