Indonesia's reasons to smile

Indonesia's reasons to smile

DR TERRY LACEY
JAKARTA

Tuesday, November 18, 2008

MUSTIKA Ratu, the leading Indonesian cosmetics company, is smiling because as consumers fall away from expensive brands like L'Oreal they head down-market, as reported recently in The Jakarta Post (11/13/08). So in the first nine months of 2008 Mustika generated US$19.43 million ($29 million) of revenue, up 23 per cent on 2007.

This middle and down market cosmetics company expects to hit 20 per cent of its revenue on exports this year, to hold its Western markets despite recession because budget conscious consumers will stay with them and to build new export markets in the next few years in Asia, Europe (probably in Eastern Europe) and in the Middle East.

From the latest seminar in Jakarta on "Investment Prospects in the Upcoming Election Year" run by the Bisnis Indonesia newspaper group in Jakarta on November 13 the economic prospects for Indonesia for 2009 look mixed, but by no means all negative.

Economic growth can still reach 5 or 6 per cent in 2009 and the country may not need to use the World Bank standby loan of US$2 billion, triggered if growth falls below 5.8 per cent.

The latest economic projections from the UK Economic Intelligence Unit (EIU) arguing a growth rate for Indonesia of only 3.7 per cent are much lower than those of local economists.

The projection seems to underestimate local strengths and perhaps reflects a mechanistic Eurocentric model. The EIU projects global recession (based on global growth but under 2.5 per cent) whereas local economists say Southern countries face a downturn induced by a Western recession, not a global recession.

There is no agreed definition of a global recession. It is not based on the agreed definition for a national recession, which is two consecutive quarters with negative growth.

The definition of global recession now put forward by the EIU (below 2.5 per cent growth) and the IMF (below 3 per cent) seems to be a way of taking the continuing relative success of Southern economies to facilitate a contradictory twin track argument. You are in the same position as us so give the liquidity you have and we don't. We may all be in the same boat but we are not in the same position. Those demanding access to Southern liquidity now were the ones who maintained a near political monopoly over the Bretton Woods system.

Some economists from G7 countries, faced with the end of its role as an exclusive global economic in-group seems to be attempting to globalise the concept of recession for their own political advantage rather than taking a more positive approach to mobilise the G20 to help get the world economy going again, as UK Prime Minister Gordon Brown has suggested.

They seem determined to have one more try to subordinate the southern economies to the failed formulas of the old system. Southern political and economic leaders are deeply suspicious of the financial logic now being pursed by the IMF and fear it represents the replication of the mistakes it made during the 1998 Asian crash.

Southern countries, economists and politicians are increasingly fed up with mechanistic Eurocentric economic modelling that's seems designed to drag Southern economies down the same hole into which those of the West have already fallen.

And local stockbrokers trying to talk down confidence in the Indonesian banks with panic SMS messages in order to make money are likely to get themselves arrested (one was two days ago), while crooked bankers in Indonesia are also ending up in jail.

Indonesia got the IMF treatment once (in 1998) and if it needs a loan this time to finance economic counter-measures against the downturn then it will take a standby loan from the World Bank and on different terms from those of the IMF. God help Iceland, Hungary and Pakistan if the IMF does to them what it did to Indonesia last time.

Indonesia is now among the top 20 economies in the world (and on the UN Security Council) and its position within the G20 is assured by continuing growth rates. It is overtaking Belgium and Sweden and will overtake Turkey to become the largest Muslim-led economy in the world.

It is likely to keep growing and then join the top ten economies in the world sometime between 2020 and 2025. Indonesia is on the move, despite still having too much poverty and under-development. As long as it stays stable, with a strong democracy and gradually improving economic and financial management, then it will stay on track.

Indonesia still lacks confidence and has not fully recovered from the 1998 banking crash, when it took a greater hit because the IMF medicine initially made the illness worse.

However its economic results now speak for themselves and the country has much improved economic and financial leadership under the Government of President Susilo Bambang Yudhoyono and its formidable Minister of Finance and Acting Coordinating Minister for Economic Affairs, Sri Mulyani Indrawati.

If Western leaders could see local Indonesian data on banks and business applied to their own countries, with 2008 growth at 6.3 per cent, low non performing loans in the banking system (around 3 per cent ), US$50 billions cash of foreign reserves, US$10 billion invested abroad and US$60 billions of inward investment, then they would be over the moon.

Current newspaper headlines in Indonesia point to plenty of good news in this giant archipelagic country, five hours across on a jumbo jet.

Seen from Jakarta, Indonesia, the ups and downs of Wall Street and Main Street in the United States are a long way away and London, Paris and Berlin are not much nearer. But the cold winds of the Western recession are affecting Indonesian export markets and having some negative impacts on the financial system and the real economy. However there is absolutely no chance of a national recession here. Although many Southern countries will suffer a downturn most are unlikely to go into national recession, if the economic news in Indonesia is anything to go by. Local news headlines are about declining growth in some sectors and additional risks to be managed. But some companies are doing better because of the worldwide downturn and there is an opportunity to focus on strengthening the economic grass roots here while the West takes two years to recover. Paradoxically the more integrated, globalised and Westernised an economy is, the more likely it will be to join the Western countries in a full recession, so Singapore may have a recession while Indonesia will not.

Bank of Indonesia Deputy Governor Muliaman D Hadad warns that the rate of non performing loans could go up, because of fluctuations in commodity prices, especially oil palm. Also that the growth in bank lending may decline from 33 per cent in 2008 to 22 per cent in 2009, but that the latter target is perfectly realistic.

Meanwhile Ramzi A Zuhdi, Bank Indonesia director of shariah banking, points out that the shariah banking sector is expected to grow by 20 per cent in terms of assets and 30 per cent in terms of loans in 2009. Indonesian shariah banking will have grown in this current year by 35 per cent in terms of deposits and 26 per cent in terms of assets and lending. In Indonesia shariah banking is under-developed and has a long way to go, but its expansion appears to be almost 100 per cent insulated from the Western recession.

Local front page financial news has been dominated by the stock market crash in the first week of August and the ensuing saga, like a trip-roaring novel on high finance and intrigue, of the renowned Indonesian conglomerate, the Bakrie Group. But Bakrieland is not Indonesia. It's just a part of the picture but not central to the new fundamentals. Indonesia has a self-generating economy sustained 65 per cent by consumption, and a huge and growing number of SMEs, backed by a large +US$100 billion state budget, and a strengthening tax base.

The stock market crash of the Bakrie Group and its Herculean efforts to sell off a 35 per cent stake of the shares in the Bumi Resources coal company, said to be worth US$1.3 billion, but subject to plummeting share prices in the last month, attracted rival offers from Northstar Equity Partners, a US buyer lined up with local Indonesian State Owned Enterprises, versus an offer from San Miguel Corp, the largest food and beverage conglomerate in the Philippines, which also has heavy clout in Asean and global reach.

This story tended to dominate the Indonesian headlines and the trades on the Stock Exchange. But this will not determine the future of the Indonesian economy.

What it tells us about fundamentals is of more importance. Indonesia has substantial resources including huge coal reserves. It has an under-developed energy sector requiring an additional 40,000 Mwe of power by 2025, with large potential for hydro power, geothermal and renewable energy and biofuels. Indonesia needs US$100 billion of private investment over ten years, half of it for energy.

If Indonesia is to continue to grow at between 5 and 6 per cent, or to push the growth rate up to 7 per cent after 2010, then what is needed is less focus on the adventures of a few politically connected oligarchic families who previously dominated the economy, along with the State Owned Enterprises, and more focus on strengthening SMEs in the decentralised provinces, right down to community level, to mobilise the coalition that can put Indonesia into the top ten economies in the world.

Many Southern countries are now sympathetic to what UK Prime Minister, Gordon Brown, says is needed. To invest and finance our way out of trouble, and to mobilise the wealth and liquidity of Brazil, Russia, India, China, (the BRICs) and of Asia, the Middle East and the G20 to get the world moving again. Working together on this basis to save the world economy and help each other is a great idea and Southern public opinion will support this, but subject to one political condition.

This means the restructuring of the world's financial architecture and economic management, taking account of the new global balance of power. That's the deal.

The Brunei Times