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Indonesia's reforms start to bear fruit

The successful privatizations of banks taken under the wing of the state after the 1997-98 crisis and well-received bonds have boosted investor sentiment about Indonesia.

Indonesia's banking sector, deep in crisis since 1998, is finally beginning to recover. The sale last month by the government of one of the biggest banks nationalized after the sector's collapse, and a further successful international bond sale by the biggest state bank, has improved investor sentiment, prompting optimism about further privatizations still in the pipeline.

The optimism reflects growth in confidence about the broad stability of the macroeconomy. This has shown significant improvement across most indicators over the past year, including a strengthening currency, reduced inflation and debt, continuing growth of around 4% and a stable export performance. Only incoming foreign investment lags, still dogged by fears about corruption and a dysfunctional legal system.

Worries about political risk have diminished following Indonesia's crackdown on terrorism in the wake of the Bali bombing last year, and its comparatively muted opposition to the war in Iraq.

Brightening foreign investment prospects The success of the sale of Bank Danamon has boosted prospects on the foreign investment front, which had been blighted by fears of a nationalist backlash similar to the one that accompanied the sale of telecommunications operator PT Indosat late last year. Both were sold to companies controlled by the Singapore government.

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