November 2010

"Double-A Team" inspires new hope for Indonesia

Government officials hope that international investors will look afresh at Indonesia. Susilo Bambang Yudhoyono's government made history with its re-election. It is using a strong popular mandate to tackle corruption and bureaucratic shortcomings head-on. Eric Ellis reports from Jakarta

Left to right: SBY, Agus Martowardojo and Darmin Nasution

AFTER 30 YEARS of kleptocratic dictatorship and a decade or so of wobbly democracy, Indonesia has no shortage of monuments to bad government, corruption and squandered foreign investment opportunities in a country whose 240 million population, third only to China and India in Asia, suggests it should be a regional champion.

There’s the bane of any business visitor to Jakarta, the seaside tollway between downtown and a dated international airport that’s liable to disappear under a high tide. That’s after enduring a contemptuous two- to three-hour queue at arrivals simply to enter the country, often after an hour waiting to pay the $25 "improvement" fee, and all this before getting to luggage that too often goes missing. Then you plunge into several hours of chronic gridlock to get into town. Flying around the sprawling archipelago can be a crap shoot too; Indonesia has one of world aviation’s worst safety records, its aircraft only recently, and tentatively, allowed to fly into Europe’s more exacting skies. And there’s the notorious "special commissions", the "tea money" for access to government power brokers, and the disdain the nation’s businessmen, regulators and judicial system too often have for foreign investors, shareholders and bankers seeking a semblance of due process, legal protection and the most basic of corporate governance for their investments. Indonesia has too often been a poster child for venality, greed and lawlessness.

But as Indonesians such as Gita Wirjawan argue after a big and mostly positive year for their country, that "bad Indonesia" is fast becoming a thing of the past as the nation moves to secure viable institutions, international investor confidence and, more important, investment-grade ratings that could usher in a wave of serious foreign investment.

A former JPMorgan country manager in Indonesia, 45-year-old Wirjawan is now part of the Susilo Bambang Yudhoyono government, the cabinet-level chairman of Indonesia’s Investment Coordinating Board, known by its Indonesian acronym BPKM. At Morgan, he helped drive deals to Indonesia when the country wasn’t as fashionable as it is becoming now.

"I fully understand the concerns that investors have here," says Wirjawan. "I know, I was one of them and it was often a struggle, but I genuinely feel we have turned a corner." Of course the US-educated Wirjawan is paid to say that. But as one of Indonesia’s new breed of national leaders untainted by the lingering stains of Suhartoism, perhaps the most eloquent statement of Wirjawan’s confidence is that he hasn’t been able to indulge in his great love, jazz (he owns an iconic Jakarta jazz club). "I’ve been way too busy," he gently laments. "We are getting great traction internationally now, and this is very exciting."

Wirjawan’s ministry highlights a new corporate style that he hopes is catching on through the bureaucracy – there are fewer batik shirts and safari suits so redolent of the civil service, where nationalism often mattered more than productivity. Lifts work, phone calls and emails get returned. At Wirjawan’s BPKM, the feel is less bureaucracy and more investment house.

It’s been a mostly positive year for Indonesia, the poorest but one of the fastest-growing members of the G20 grouping of the world’s leading economies. The government of former general Susilo Bambang Yudhoyono (commonly known as SBY) is secure in its second five-year term, having achieved the double of being the first administration in the country’s recent democratic history to serve out a full term and to be democratically re-elected, perhaps Indonesia’s greatest achievement since throwing off the tyrant Suharto in 1998.

Inflation had been checked to a low of 3.4% but has recently edged higher to a still-manageable 6%. Averaging 9,100 to the dollar after reaching a high of 8,841 this year, the rupiah has been among Asia’s sturdiest currencies in 2010. Indonesian stocks surged 90% last year and are up another handsome 20% so far in 2010. GDP expanded by 6.2% in the second quarter of 2010, and most economists forecast that the full-year growth will be between 6.5% and 7%, slightly above the number Indonesia needs to sustain jobs. Barely scathed by the 2008 "Atlantic financial crisis" – as they like to call it in Jakarta – GDP growth is expected by most analysts to trend higher to 7% to 8% through 2013-14.

New governor

After enduring years of corruption scandals and parliamentary sclerosis, in June Bank Indonesia (the central bank) finally appointed a governor, Darmin Nasution, while clearing off some cancerous deadwood from its executive ranks. Nasution’s appointment has been well received by BI watchers.

True, SBY lost his sainted finance minister, Sri Mulyani Indrawati, during the year, when she was appointed as managing director for the Asia slot at the World Bank in Washington after a long-running feud with the powerful businessman-politician Aburizal Bakrie.

Bakrie is one of Indonesia’s richest men and a Suharto-era holdover who now heads Suharto’s old political fiefdom, the Golkar Party, whose coalition support SBY needed in his first term to ram reform through an often dysfunctional parliament. As Mulyani vacated her desk for Washington, observers regarded her feud with Bakrie as a 1-1 draw. A minister in the first SBY cabinet, Bakrie frequently took potshots at Mulyani, who would return fire with gusto, regarding Bakrie’s presence around the most senior levels of government inappropriate if, as many Indonesians suspected, he was continuing to run his mining to telecoms corporate empire from office. Mulyani made efforts to beef up Indonesia’s corporate regulator, Bapepam, attempts that sometimes snared Bakrie’s companies in its investigations. And she openly enjoyed SBY’s re-election last year in a poll where Bakrie’s Golkar lost support, and was no longer necessary for coalition-building.

Mulyani was once regarded as irreplaceable but her loss wasn’t as painful to Indonesia as the markets had feared. Her successor, Agus Martowardojo, who was born in Amsterdam and who came to office painlessly from the chief executive slot at highly profitable state-owned Bank Mandiri, has also been well taken by the market.

Wellian Wiranto, HSBC’s Singapore-based Indonesian specialist, hails the new Martowardojo-Nasution combination at the helm of economic policy as the "Double-A Team," bolstered by the simultaneous appointment of senior technocrat Anny Ratnawati as director-general at the finance ministry. Ratnawati was promoted from the ministry’s budget management office, where she was a key ally in Mulyani’s reform drive inside the ministry.

"We view the selection of the ‘Agus-Anny’ pair as a positive development for the country’s reform process," says Wiranto. "Martowardojo carries the reputation of a ‘fix it’ manager courtesy of the fact that he had successfully turned around Bank Mandiri. He instituted tough structural changes that brought the country’s largest lender a marked improvement in its operational performance."

Carrying the torch

HSBC’s Wiranto says the Martowardojo-Nasution-Ratnawati trio are "competent technocrats who will continue to carry the torch of reforms that Mulyani has ignited and nurtured during her five-year tenure at the pivotal ministry." Nasution’s appointment, says Wiranto, is "another key support factor in Indonesia’s drive to push its economic growth to a structurally higher level."

Wiranto expects Martowardojo’s managerial track record will further propel institutional reforms within the finance bureaucracy – "his banking experience could help to quieten the curious murmur of concerns among some domestic opinion-makers that the administration has been too focused on macroeconomic stability and not paying enough attention to the real sector performance."

"These positive credentials notwithstanding, it will take some time for the markets to get to know both of the new leaders, who are still relative unknowns, especially compared with the vocal Mulyani.

"The new finance minister and his deputy will be able to sustain the country’s admirable macroeconomic stability, and win more confidence and recognition along the way. In the near term, we will be watching closely for their actions in relation to the reform agenda, particularly on the tax and customs fronts."

Barclays Capital’s Indonesia economic team, led by Prakriti Sofat, is also upbeat about the Martowardojo-Ratnawati team at the finance ministry. "Although concerns about policy drift have been expressed in the media and the market, we believe there are a number of qualified technocrats with the background and skills to fill Mulyani’s position," Sofat says. Also, president Susilo Bambang Yudhoyono has clearly stated that Mulyani’s successor "would have to carry on financial and tax reforms she had initiated during her tenure".

Sofat continues: "With president Yudhoyono winning a second term, we expect policy to focus on economic stability and structural improvements. We also expect the government to continue its anti-corruption drive and seek to improve the country’s infrastructure. Overall, we believe the country’s stronger political environment sets the stage for more effective policy settings and increased stability."

James Bryson, chief executive of the Jakarta fund management boutique HB Capital, says Martowardojo "faces the usual sources of resistance to continued economic and administrative reforms, the institutionalization of which is what all three rating agencies have said is necessary for Indonesia to achieve investment grade."

Bryson says Martowardojo’s "style and attributes are in contrast to Sri Mulyani. She’s an economist who probably has a better understanding of the macro nuts and bolts while his monkey wrench throughout his professional career has been focused on management at the micro/corporate level."

He adds: "Agus’s delivery and approach in meetings is fairly punchy," noting that he has been laying down the law to ministries notorious for tardiness. "He’s said to a couple of latecomers of at least moderate rank, and in front of the rest: ‘Next time, arrive on time, or don’t bother coming’. Bring it on!"

A noted Indonesia analyst, Bryson points to several critical issues for Martowardojo in the coming year. "He must maintain the momentum of previous reform wins in tax and excise," he says. "I’d like to know his plan for increasing tax collection, which I believe is targeted to be 12% in 2011."

And, Bryson asks: "How can the government be persuaded to become looser with their cash? Indonesia is in danger of becoming net cash at the budget level by the end of this year, just because they continually fail to execute their spending plans." He says: "It might look clever to have an ever-shrinking budget deficit, but it means the economy is growing despite the government and not because of it."

He says the Q2 GDP growth of 6.2% was impressive but it was all from surging private consumption and investment, while the government consumption element actually dropped by 9%. "Get that to turn around in a meaningful way and he will rock, as will we!"

So, investors and economists ponder, is this particular Indonesia turnaround story to be judged as glass half-full or glass half-empty? As one of the ‘boomiest’ members of the G20, does Indonesia deserve its membership in this prestigious club? Has Indonesia genuinely turned a corner, or is it just window-dressing, again? Smart money, or dumb money... it’s difficult to judge.

Good versus bad

World-weary investors like to reduce Indonesia’s efforts to normalize as an arm-wrestling contest between "goodies" and "baddies". The goodies are reformist, and gather under the moral and electoral authority of the SBY presidency. They argue that, yes, reform is sclerotic but there is clear evidence that it is happening and after 12 years of democracy, previously disenfranchised Indonesians are starting to understand that reform delivers not just a vote but, even more important, credible, transparent institutions.

Hong Kong-based Simon Goddard, managing director of regional business intelligence agency Global Insight, says: "SBY had indeed shown stability in being able to hold his government together for longer than any president since Suharto. But if that is meant to be a sign of progress in Indonesia, it’s about as convincing as saying that the US economy has turned around because of the bailouts – in other words, a little optimistic and self-serving.

"But what has changed? The culture of cronified patriarchism is still pervasive in Indonesian politics and business, and that breeds and maintains rampant corruption that is still very much the norm. Transparency is still virtually nonexistent; many state officials, the police being a shining example, are still paid lower than subsistence wages on the basis that they will be the beneficiaries of bribes and therefore don’t need a salary. Judicial independence is, to say the least, suspect... so the lack of transparency, corruption, a shaky legal system all continue."

Goddard cites cases such as the unedifying – and revealing – daily saga of the whistle-blowing senior policemen Susno Duadji and a tax official, Gayus Tambunan, that continues to rivet Indonesians. The case has highlighted how deeply embedded corruption is in Indonesia’s civil service. Susno is accused of trying to destroy Indonesia’s widely admired anti-corruption authority, which had been investigating corruption in the police force and judiciary, while Gayus allegedly accepted black money from some of Indonesia’s wealthiest and most powerful people in return for favourable tax rulings.

Hiding out in Singapore, taxman Gayus was persuaded by Indonesian investigators to return voluntarily to Jakarta, where he has been disgorging tip-of-the-iceberg revelations about corruption in the tax department, the police force and judiciary, while explaining how a man earning around $500 a month had a $3 million account in Singapore, long regarded as a bolt hole for dodgy Indonesians. It’s an ugly tale but where it is telling in the context of an Indonesia trying to become normal is the fact that these matters are being aired at all, symbolic of the efforts, however difficult, for SBY to make good his electoral pledge to defeat corruption.

But old habits die hard and so, it seems, do old cronies of the putrid Suharto era. These are the baddies; Suharto’s wealthy political and business cronies and their heirs who, were Indonesia Russia, would be described as oligarchs. They relished the old Indonesia, where business was corruptly transacted in wreaths of aromatic kretek cigarette smoke, and where justice was for sale to the highest bidder.

Academics such as Jeffrey Winters of Northwestern University argue that the 1998 fall of Suharto wasn’t so much a revolution but "simply a lopping off of the head with the body still in place." Suharto-era networks remain immensely powerful in Indonesia, and have their placeman in SBY’s cabinet, at the highest levels of the civil service – witness the recent scandals of the once untouchable Bank Indonesia – across parliament and the judiciary.

This correspondent has met bankers and investors who collectively lost billions in the Indonesia train wreck that was the banking collapses that followed the Asian financial crisis of 1997-98, exacerbated by a spate of corporate bond scandals of the early 2000s when investors’ money was literally stolen and salted away in obscure tax havens while thieves made sure any legal action wouldn’t reach first base in Jakarta’s notorious courts. These disgusted investors vowed at the time that they would never sink another penny into Indonesia. And yet many have recanted, seeing genuine opportunity as the nation struggles to throw off its dodgy past and secure meaningful institutions.

Achieving investment grade will be a massive step. HB Capital’s Bryson says: "In the eyes of the wider investment community, the gradual realization that Indonesia is no longer the default basket case of yesteryear is largely in the price. In order to raise growth from 6% to Indian levels of 7.5% plus, in addition to achieving investment grade, the most important catalyst will be infrastructure, the obvious glaring failure of the last six years."

Focus on infrastructure

Wirjawan agrees. "Infrastructure is the key," he says. "This will be the major focus of this government." Indeed, as Wirjawan was speaking, his president was setting down his landmark National Day Speech that mostly dwelt on upgrading the country’s appalling infrastructure. Wirjawan looks to countries such as neighbouring Australia, booming on the back of a minerals exports bonanza to China. Wirjawan notes that Indonesia has "a lot of the same stuff as Australia and we can get it out of the ground cheaper. But getting it to port has been a problem. That is fast being fixed."

Wirjawan is also focused on winning and then securing investment rating upgrades for Indonesia. Barclays Capital notes "an upgrade to investment grade by two of the three rating agencies automatically would make Indonesia’s external debt eligible for inclusion in the Barclays Capital Global index. We estimate $1.5 trillion of funds are benchmarked to this index."

Bryson says: "The significance of the upgrade will be the reduction in interest expenses for the government and a reduction in the cost of capital at all other levels as well, and an underpinned currency, and therefore it’s one catalyst for higher growth rates."