8 Feb 2002

INDONESIA: An archipelago-ing to hell.

Doing business in Indonesia is tough, reports Eric Ellis

IT'S GOT massive foreign debt, a succession of short-lived and sclerotic governments, a once-robust economy now imploding in slow motion and it presents a huge threat to its neighbours. Yet another story about Argentina? John Howard will discover today, as he tours Jakarta, that it's a tale much closer to home - the fractious Indonesia.
And if he extends his reading beyond Wisden and the briefs of the Australian media, he may see Megawati Sukarnoputri's - and Australia's - problem mapped in a front-page article in the region's leading newspaper, The Asian Wall Street Journal.
The AWSJ articulates what many have suspected: that the six-month honeymoon for "Mega" is over, and that she and her once well-received Cabinet have little stomach for the economic and political reforms the crippled country so desperately needs.
Citing her lack of ideas and conservative approach (a polite way of saying she's fiddling while her Rome burns), the AWSJ makes a strong case that, although Indonesia has settled since the eccentric reign of Abdurrahman Wahid, that doesn't mean there's much official zeal for reform.
Indonesia remains desperately poor. Official corruption is rampant, and sectarian and separatist conflicts continue across the archipelago.
The rupiah is the most reliable guide to understanding Indonesia's replacement of Burma and the Philippines as Asia's economic basket case.
Solid at 2500 to $US1 for much of the Suharto period, the currency slumped to 17,000 in the turmoil that followed his ousting in May 1998. It settled around 10,000-11,000 through the administrations of presidents Habibie and Wahid, then jumped into the 7000s last year on the hopes that surrounded Megawati's elevation.
So how many rupiah will Howard get today for the spare greenbacks he's carrying from his US jaunt? About 10,300 - back to where it was before his summit partner took office.
The latest threat is inflation, which has crept up to about 10 per cent, spurred on by shortages of basic commodities such as palm oil, rice and sugar.
Indonesia's troubles threaten its relationship with multi-lateral lenders, such as the International Monetary Fund, that want more progress on reform and restructuring.
The nation turned to the IMF for a multi-billion-dollar bail-out during the 1997-98 financial crisis. The trade-off was a commitment to massive reform, a promise no subsequent government has kept.
Unlike South Korea and the Philippines, which also sought IMF help at the time, Indonesia's debt has crept up, although government officials claim it is still servicing the load.
Credit Lyonnais Emerging Markets says Indonesia's public debt, expressed against its economic output last year, has reached an alarming 109.1 per cent - almost five times what it was before the financial crisis. CLSA compares it with Argentina, where debt is about half gross domestic product.
With about $28 billion in foreign exchange reserves and an economy that's expected to grow by 4 per cent in 2002 (slightly faster than last year), Indonesia looks to be able to manage its foreign debt repayments without stifling growth.
Foreign investors, ordinarily gleeful at the prospect of bottom-fishing for cheap assets, mostly regard quixotic Indonesia with a heightened sense of caveat emptor.
Indonesia's Bank Restructuring Agency has emerged as, in effect, the nation's biggest economic entity having seized many of the ill-gotten gains of Suharto and his cronies. It is hopelessly politicised. It has had five chairmen in less than four years, and is losing good people. One well-regarded deputy chairman was forced to leave because a senior executives had spread spells around the office.
Indonesia's recent history is replete with examples of foreign joint ventures ending in tears - one reason direct foreign investment approvals fell from $US15 billion in 2000 to $9 billion last year. Actual foreign investment is a fraction of that.
It's easy to see why. Take the case of AT&T, one of seven foreign telcos that entered into a Baby Bell-style break-up of Telkom Indonesia's monopoly in 1996.
For three years, as AT&T built up the Ariawest joint venture - AT&T providing much of the cash and technology while Telkom provided personnel and skills - the venture seemed better than most.
Then it turned pear-shaped. AT&T suspected fraud in some of its networks and relations deteriorated to the point where the two are now at loggerheads in a Geneva courtroom (as per the agreement AT&T wisely demanded because of the unreliability of the local judicial system).
The other Baby Telkom ventures are in the process of being wound down or have been undone - the exception being government-owned Singapore Telecom, which has extended its connections by buying into mobile operation Telkomsel.
Another infamous flame-out is Asia Pulp and Paper, which wanted to be one of the world's biggest packagers as Asia's new wealthy went on a buying binge. Investigators now are trying to track money to the likes of the Cook Islands. 
The Anglo-Australian miner Rio Tinto is also having problems. The East Kalimantan Government is suing Kaltim Prima Coal, a joint venture of Rio Tinto and British Petroleum, in a $US1.5 billion suit for allegedly delaying the sale of a 51 per cent stake to local investors.
The venture's 30-year operating contract, agreed in the good times of 1992, states it must eventually divest a majority stake to Indonesian companies. Now Kaltim Prima is claiming a government policy towards the joint venture in 1996 has caused delays in the divestiture process.
In the meantime, local officials have threatened to seize the venture's assets, while the two foreign parties say they will review ongoing investments in Indonesia.
All of which should make for interesting discussions between Howard and Megawati - should they graduate beyond people-smuggling during this week's testy summit.