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Megawati Soekarnoputri |
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The aura of calm efficiency surrounding the new Indonesian administration of president Megawati Soekarnoputri has come as a relief to most Indonesians. After nearly four years of riots, coup rumours, unpredictable policymaking and political infighting, a rest is as good as a holiday.
Behind the scenes there is considerable activity to lay the foundations of a well-run government. The president has appointed a cabinet of respected professionals. A new letter of intent has been signed with the IMF. In a move that will restore stability to regional politics, the president has visited all Indonesia’s neighbours and received Australia’s premier.
The military, whose support was crucial to her smooth takeover, says it is willing to pull out of politics, and the president says any official doing business with members of her family will be fired. The currency, has leapt more than 30% and a crucial debt rescheduling with the Paris Club is likely to go through smoothly following restoration of relations with the IMF.
So far, so good. But can Megawati keep up the momentum in a nation that has looked almost ungovernable in the past few years? Relations with the powerful parliament – which eventually unseated her predecessor, Islamic leader Abdurrahman Wahid, after an 18-month campaign of attrition – are yet to be tested. They should be smoother because of her party’s large representation in the lower house. The dysfunctional legal system requires complete overhaul and a flawed regional autonomy programme put in by the government before last created more problems than it solved.
Foreign investors remain deeply cautious, unimpressed with Indonesia’s ability to sell off state firms and assets taken over during the financial crisis to pay off its $140 billion foreign debt, and fed up with poor security and ineffective legal protection.
Says Michael Chambers, head of institutional sales at HSBC Securities: “The government needs to spend a little political capital and tackle something difficult, to show its authority.”
Such an opportunity may come with the privatization programme, targeted to raise $764 million this year. The head of state-owned enterprises is Laksamana Sukardi, a former banker and political aide to the president, who is also in charge of the Indonesian Bank Restructuring Agency (IBRA). Sukardi, who has a spotless reputation and is popular in the markets, has pledged to tackle the political problems in asset sales. These include corruption among power holders and former owners of the assets, opposition from nationalists who regard it as selling the nation’s birthright, and concerns that the assets would achieve only low prices and sales should be delayed.
Indonesia plans to sell its stake in cement producer Semen Gresik and a stake in Bank Mandiri. It will also sell a majority stake in Bank Central Asia and a holding in Bank Niaga, both under IBRA control.
Sale of majority control in Semen Gresik to Mexico’s Cemex – the second stage of a deal agreed several years ago, would go through at above the market price and raise $500 million immediately. But the deal has been held up by complaints from people living near two regional cement plants owned by Gresik on the islands of Sumatra and Sulawesi. Local governments, newly empowered under the local autonomy laws, have demanded that the central government return control of the plants. Although Sukardi says the Cemex deal is “sensitive”, its inclusion in the IMF letter suggests the government plans to enforce its foreign contracts, as Megawati had earlier pledged.
Sale of the banks may prove more difficult. Efforts to sell a minority stake in Bank BCA foundered when rumours began to circulate that the Salim family, former owners and cronies of disgraced ex-president Suharto, were trying to rebuy the bank through the back door. Although IBRA sold 10% of BCA’s equity through the market, its further offer of only a 30% stake was unattractive to foreigners. The government will now offer majority control, but investors may still be put off by lingering vestiges of the former owners.
Bank Mandiri, the other privatization candidate, has been through substantial change since 1998. It has rebuilt, with new management, slimmed-down operations and a reorientation of its business from corporate to retail. The bank’s culture is changing to focus on corporate governance and anti-corruption measures plus risk management.
The bank still has market share of 25%. It has no trouble attracting deposits because of its secure profile as a government-owned bank. But it has been recapitalized with government bonds and thus its profits are not coming from loans but interest.
Chief financial officer Keat Lee says this problem will be resolved and looks to the future. “Nearly 40 million people in Indonesia are bankable,” he says, “and the country has recovered from the economic crisis. Our future looks bright.”
Meanwhile economic growth is forecast at between 3.5% and 4% this year and inflation, currently 13%, is expected to come down as the currency strengthens. Interest rates, now running at 17% plus, will decline as inflation reduces. Exports are stable and a debt-rescheduling deal will reduce pressure on the budget this year and next.
That leaves political stability as the underlying challenge, without which all the rest can come to pieces. Megawati starts off with broad support from the people (who voted for her three years ago) to the parliament and the army. Her record of 10 years waiting patiently for her chance suggests she will be the steady force Indonesia needs.
