Indonesia looks forward to continued reform

WITH Susilo Bambang Yudhoyono (SBY) re-elected for a second term as Indonesia’s president, the big question Jakarta bankers are asking is whom he will appoint to his cabinet.

Bankers have been happy with the incumbent finance minister, the capable and – more important for one of the world’s most corrupt countries – clean Sri Mulyani Indrawati. Her steady hand has stabilized the economy and has so far managed to avert the worst of the global financial crisis.

Indonesia needs annual GDP growth of 6% or more to keep its doors open and people in jobs and so far Mulyani has been able to deliver.

Some bankers forecast that she will be replaced by the urbane Gita Wirjawan, JPMorgan’s former country head in Indonesia, who now runs a prominent private equity company, Ancora. Since SBY grabbed Bank Indonesia governor and former finance minister Boediono as his vice-presidential running mate, the central bank slot has been formally vacant, with Mulyani filling in part-time alongside finance.

Speculation in Jakarta banking circles has it that Mulyani might move over to the central bank full-time and begin fundamental reform of the scandal-racked institution, while Wirjawan takes the finance portfolio.

More likely, however – and an outcome that would placate a market keen for an accelerated reformist direction of SBY’s second mandate – is for Mulyani to finish her work fixing finance, with a newer reformist face taking the BI governorship.

A leading contender is Agus Martowardojo, who has done a good job heading state-owned Bank Mandiri, Indonesia’s largest bank, which was created a decade ago out of the chaos of the 1997-98 Asian financial crisis. Bank-of-America trained, Martowardojo joined Mandiri in 2005 and has successfully consolidated the bank out of the best of four failed state banks. He was overlooked for the BI governorship the last time it was on offer.

Wirjawan could go into BI but he is more likely destined for the state-owned enterprises portfolio, which really means minister for Pertamina, the traditionally scandal-prone state oil company, long a vehicle of patronage in which Indonesian dictators park their allies.

At 44, Texas-educated Wirjawan is close to SBY, who has long wanted him to go in and clean up Pertamina, a chronic underperformer. Pertamina’s 2008 revenue was $55.4 billion but it returned just $3 billion in profit. By comparison, Malaysian equivalent Petronas turned in $77 billion in sales for $15 billion in profits. Wirjawan is a Pertamina commissioner (director) and is expected to make the leap to minister if he’s asked.

That doesn’t much please many of the Pertamina staff, nor the holdover cronies from the Suharto era who fear Wirjawan’s reputation as a reformist cleanskin and who have enjoyed lucrative years plundering Pertamina and other lumbering companies in the ministry’s anachronistic portfolio. But if Wirjawan does take on state-owned enterprises, he will have to hand over control of his Ancora investment house, which has taken a handful of strategic investments in key resource plays in Indonesia.

In the banking sector the outlook in Jakarta is mostly upbeat. Goldman Sachs has found several reasons to “keep positive” on Indonesia’s banks. It says loan growth is likely to accelerate in the half of 2009 ending in December as the world economy stabilizes, “allowing banks to re-adopt their growth strategy, and [as] political stability allows for the ramp-up in various government fiscal stimulus projects, such as infrastructure build-up”.

Goldman says sector liquidity is improving. The loan-to-deposit ratio dropped to 72% in May from a peak in mid-2008. And asset-quality concern “is gradually reduced, thanks to resilient domestic consumption, rising soft commodity prices and the rupiah, and gradual recovery of the global economy”.

The US bank continues: “We believe Indonesia’s banks are likely to return to strong growth in the second quarter of 2009 with 10% to 17% full-year estimated loan growth despite the weak/negative loan growth in the first half of 2009.” Goldman has raised its target forecasts on Indonesia banks by 10% to 19% over the next year, suggesting good times are ahead anyway, but even better times if SBY and his reformist colleagues vigorously advance the work they started in the president’s cautious first term.

(See original publication)