[Kabar-indonesia] Wide Gap Persists Between RI's Macro and Micro-Economy [+David O'Brien]

[JoyoNews at aol.com]

also: JP Op-Ed: Indonesia must push pace of reform 
or get left behind by other countries [by David O'Brien]

The Jakarta Post 
Monday, October 2, 2006

Op-Ed

Wide gap persists between macro and micro-economy 

by Umar Juoro, Jakarta

Macroeconomic stability has gradually been restored after the shock of the 
fuel hikes in October 2005. Inflation, at least on a month-to-month basis has 
been showing a declining trend, even though on a year-on-year basis it remains 
high. Inflation in the coming months is likely to decline even further 
especially on a year-on-year basis. Similarly there is a declining trend in interest 
rates. The fiscal deficit is also low. By the end of the year, it is quite 
likely that inflation will be around 8 percent and the Bank Indonesia rate will be 
around 10.5 percent, or even lower. 

However, in the fiscal policy front, there is a serious problem in catching 
up with the improvement in the macro economic condition. The ability to spend, 
especially for capital expenditure, remains disappointing at the level of the 
central and especially local government, even though there is some improvement 
compared to last year. This is a serious problem because government 
expenditure is a bridge that links the macroeconomic condition and microeconomic 
activities, both at company and household levels. 

As companies have experienced strong pressure from higher costs triggered by 
the sharp increase in fuel prices last October, the purchasing power of 
consumers in general is also seriously declining. Certainly, a reduction in interest 
rates would help companies, but this is limited to the sector that is 
sensitive to interest rates, such as construction, especially in housing development 
and ownership. 

With a declining interest rate, banks would be more aggressive to allocate 
credit to housing development and ownership to catch up with the target for 
credit growth. Banks will also be much more attracted to allocate credit to the 
commodity sector, such as plantation and mining companies to benefit from the 
high commodity prices, especially coal and crude palm oil, even though this 
seems opportunistic rather than based on a solid strategy. 

However, the banks might not be as aggressive as before in other consumer 
lending such as car loans and credit cards. The loans for motorcycles might still 
grow considerably, considering the clear demand for a reliable means of 
transportation for lower income households. However, car loans and credit card 
loans might be relatively stagnant, and may even decline, mainly because of the 
change in priorities for consumers and relatively high of delinquency rate for 
credit cards. In general, the banks still face problems of where to allocate 
credit, because there are not many companies that are considered bankable. 

The manufacturing sector in general is still struggling with high costs and 
declining consumer purchasing power. Meanwhile, infrastructure development is 
being hindered by the indecisiveness on the part of the government over risk 
sharing and other promises to make things easier for investors. Mining and oil 
and gas sectors are still not able to attract significant investment mainly 
because of the unattractive fiscal regime and cumbersome regulations. 

On this issue, the government should not pretend to be able to implement most 
of what they want as promised in the policy packages. It is good enough if 
the government focuses just on key projects and issues that narrow the wide gap 
between the macro and microeconomy. 

>From the experience under Megawati's administration it is clear that 
macroeconomic stability alone cannot guarantee high growth and job creation. 
Macroeconomic stability that was not connected with the microlevel, and especially the 
problem of increasing unemployment, could have been the main factor behind her 
failure to get reelected in 2004. 

A similar situation could happen under President Susilo Bambang Yudhoyono, 
unless his administration is able to bridge the gap between the macro and 
microeconomy resulting in a significant reduction in unemployment. Political 
analysts might say that his popularity remains relatively high, so that even with 
high unemployment he could still be reelected in 2009. This view certainly 
ignores the high expectations of voters for improvement in the economy. 

The assumption that improvement in macroeconomic stability would be followed 
by the improvement in the investment climate will not hold true unless the 
government does some serious work in the field. This is not easy and it requires 
certain experienced people to do it, something that this administration is 
seriously lacking. 

This means the administration should focus more on the implementation of the 
programs already introduced and on recruiting capable and experienced people 
who are able to implement the programs. Similarly, each region has a different 
capability in implementing the program. A general approach cannot work. Yet 
most importantly, there is the need for firmer leadership from the President 
himself. 

Closing the gap between the macro and microeconomy, under current conditions, 
cannot be done in a general fashion. There is a need to sharpen priorities, 
to focus on delivery, to gather capable institutions and people to do the job, 
and the willingness and boldness of the leader to take action with some risks. 
Otherwise, the economy will just float around and expectations will 
dissipate. 

The writer is chairman of the Center for Information and Development Studies 
(CIDES) and a senior fellow at the Habibie Center. 

------------------------------------

The Jakarta Post 
Monday, October 2, 2006

Op-Ed

Indonesia must push pace of reform or get left behind by other countries 

by David O'Brien, Jakarta

The issue of continued slow recovery of the Indonesian economy and in 
particular the perception of Indonesia as a suitable investment destination has again 
hit the spotlight. I particularly enjoyed the views expressed by Budiono 
Kusumohamidjojo in his article in The Jakarta Post of Sept. 18 and his conclusion 
that there is a need for courageous reforms.

At the macro economic policy level the right messages seem to regularly be 
issued, however actual changes in transparency, attitudes and processes remain 
notoriously slow. 

The need for a sense of urgency first occurred to me after a recent Japanese 
investment forum. Here it became clear that the rest of the world is moving on 
and Indonesia seems to struggle to acknowledge the need to adapt to the rapid 
pace of change. 

A review of surveys of investors by the Japanese bi lateral body JBIC 
provides an informative insight as to investors thinking over time. In 1998 Indonesia 
ranked in third place behind China and U.S. for Japanese external investment. 
By 2005 Indonesia had fallen to eighth place, having been usurped by India, 
Thailand, Vietnam, Russia and Korea. 

This was further reiterated in the most recent World Bank publication on 
business competitiveness. Indonesia had slipped slightly further behind. In 
releasing the report it was pointed out that the issue was not so much a lack of 
reform in Indonesia rather than the pace of reform relative to competitors. 

The longer term strategic thinking of the government is now reported to have 
shifted. Rather than be a mere exporter of natural resources the new direction 
is to utilize those resources within Indonesia. Foreign companies are now 
being encouraged at high levels to relocate energy dependent industries to 
Indonesia rather than import raw materials. 

It is a laudable aim and will require great skill in implementation to be 
successful. Lower priced energy is certainly a plus but without the difficult 
micro economic reforms in the legal, education, labor and overall business 
environment it may not be enough to justify shifting industry. 

About a month ago, at yet another investment seminar, BAPEPAM (Capital 
Markets Regulatory Authority) presented a comprehensive list of reforms it planned 
to undertake. The guests, including representatives of the Australian 
regulatory arm, ASIC enthusiastically greeted the plan. 

As with the seemingly endless seminars that lead to no results, there are 
well drafted blue prints in place that seem to lack implementation. In the 
meantime Indonesian companies take advantage of the laxness and further harm the 
perception of the country for investors. 

The recent history of Bumi Resources would seem to raise a number of 
questions in relation to transparency to the market and limited examination by the 
regulators. In May of this year to much fanfare it announced the signing of a 
sales and purchase agreement for US$3.25 billion in relation to key assets it 
controls. 

The mines Kaltim Prima Coal and Arutmin had been earlier acquired for a price 
said to be in the region of $650 million. They were originally purchased from 
foreign owned firms that were required to sell down their controlling 
interest in line with the existing mining law at the time. This required divestment 
of a controlling stake in the mine to local investors after ten years of 
operation. 

At the time of the announcement it appeared to be an opportunistic sale of 
key mines at a time of record commodity prices. However one of the most closely 
watched commodity price indices, the Reuters/Jefferies CRB Index, is now 16.5 
percent below its May high, at a level last seen in July last year. 

Some eyebrows were raised when the buyer was revealed to be a shell company 
owned by the Jakarta investment bank, Renaissance Capital. 

Renaissance Capital was established in 2002 by a group of Deloitte Touche 
Tohmatsu partners. The firm faced conflict of interest concerns when both 
auditing IBRA (Indonesian Bank Restructuring Agency) and having a separate division 
advising on restructuring and divestments. The non audit team subsequently made 
the move to establish Renaissance. 

Renaissance and its subsidiary Recapital Advisors have since been involved in 
the acquisition of a number of assets overseen by PPA. This is the entity 
created to dispose of those assets not divested by the end of the regulated term 
of IBRA. 

In late 2005 this included the acquisition of 71.6 percent of Bank BTPN. This 
bank was formerly associated with Bakrie. In this case Credit Suisse assisted 
in raising $46 million to finance the deal. This transaction obviously served 
as a trial run for this new, much more ambitious play with all the same 
players back again. 

Questions about the deal were first raised when it was announced nearly $1 
billion of the proceeds would be directed at a major coal to liquids investment 
with South African technology leader SASOL. Something seemed awry when SASOL 
denied any knowledge of the deal within a week. 

Credit Suisse and Renaissance spent months running around global capital 
markets in an attempt to raise $2.1 billion in debt. Another $700 million was 
committed by a Singaporean bank in the form of an exchangeable bond. The smaller 
proportional balance of equity proved just as difficult to source. 

The information memorandum forecast to support such level of borrowings gave 
estimated EBITDA of $583 million. Subsequent events have surely led to many 
red faces and caused untold harm to any reputation that Indonesia was recovering 
as a location for lenders. 

First half results have now been reported at an EBITDA level of $118 million. 
The fall was attributed to adverse weather conditions. However volumes of 
coal sold were not markedly different from forecast and sales prices have 
continued at as strong a level as forecast. The issue must therefore be on the cost 
side of things and one would assume that the mines now facing additional costs 
per tonne of coal mined. 

At the same time as these new financial numbers found their way to the press, 
along came news of other previously undisclosed liabilities. There are 
alleged unpaid royalties in excess of $100 million and unpaid taxes of $40 million. 

There would appear to be some cash flow difficulties for a business that in 
May was looking to secure $3 billion in debt funding. In the real world the 
regulator would be asking serious questions about disclosure of material 
information and the real purpose of the deal. 

Structural reforms are how other countries are sustaining ongoing high levels 
of growth. It is hoped Indonesia hastens its own reforms to gain the trust of 
the investment community. 

The wrier is a Technical Advisor at CSA Strategic Advisory which assists 
businesses address change by originating strategy and successfully executing. He 
may be contacted at dobrien at csadvisory.com. 

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Joyo Indonesia News Service
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