"...emerging markets will grow faster than the
developed world for decades to come."

Gideon Rachman, The Financial Times

To rehabilitate Indonesia

Political instability the biggest obstacle

Like its other Asian counterparts, the Indonesian stock market lost substantial ground in 2000. As of Dec. 7, it was down 59.5% in U.S.-dollar terms year-to-date on the MSCI emerging markets index, making it one of the worst-performing markets in the region. Comparatively, the Indonesian market was up 92% in 1999 on the index, among the best performers in the world.

Besides the general malaise that afflicted emerging markets as a whole in 2000, Indonesia has been plagued by a myriad of domestic problems that weigh heavily on the performance of its stock market and the level of investment in the country. Foremost among these problems is political uncertainty. Although a new president was elected slightly more than a year ago, his leadership remains questionable.

The political environment is very fluid, largely made up of loose alliances. The government continues to be dominated by political patronage, nepotism and control over the levers of power and security. The country’s legacy of corruption shows no signs of abating; Indonesia ranked 86th out of 90 countries in the latest annual corruption perceptions index, published by the non-governmental organization Transparency International. A cloud of suspicion still hangs over the internationally condemned massacres in East Timor last year.

Notwithstanding poor market performance, the Indonesian economy is expected to grow by 4% this year, down slightly from an estimated 4.3% in 2000. This is significantly better than the meagre 0.3% growth rate in 1999 and the post-Asian crisis decline of 13.2% in 1998. Prior to the crisis, Indonesia’s GDP grew by an average of 7.2% in the 1991-96 period.

Current economic growth is coming primarily from higher exports and, to a lesser extent, from greater consumption and domestic investment spending. Export revenues have been buoyed by higher oil prices, contributing to improvements in the country’s trade surplus and fiscal deficit. The government has boosted the country’s public debt by issuing bonds to restructure its battered financial sector. The fallout from this strategy is that the high cost of servicing the country’s debt restricts spending on infrastructure and social programs, which have deteriorated since 1997.

Indonesia is one of Canada’s major trading partners in Southeast Asia. Bilateral trade between the two countries amounted to more than $1.4 billion in 1999. Canada’s major exports to Indonesia include wood pulp, cereals, fertilizers and motor vehicles. Principal imports include clothing, electrical machinery, rubber, footwear and wood products. Canada’s Department of Foreign Affairs and International Trade sees good opportunities for Canadian firms in Indonesia in the energy, telecommunications, information technology, environmental and agri-food sectors.

Indonesia is expected to continue to benefit from International Monetary Fund loans and the rescheduling of its external government debt with major international financial institutions belonging to the Paris Club. The IMF came to the country’s rescue following the Asian crisis.

The outlook for a return of foreign capital to Indonesia remains low. Although the rupiah is undervalued relative to the US$, it experienced a roller-coaster ride in 2000, mainly a result of violence and political uncertainty. The currency has been vulnerable to social and political tensions, and its current value is less than a quarter of its pre-crisis level. Indonesia will continue to encounter problems unless political conditions change for the better and the culture of corruption is reformed. So far, that seems unlikely.

Although economic conditions appear to be on the mend, a slowing U.S. economy could hurt Indonesia’s exports, which in turn will have a negative impact on the country’s balance of payments and its currency, spilling over into other areas of the economy. While Indonesia sits precariously, it is politics rather than economics that can put it on firmer ground.

Dwarka Lakhan

Dwarka Lakhan

Dwarka Lakhan is a pioneer in emerging markets journalism in Canada. His first emerging markets article, “Africa Joins Ranks of the Emerging,” appeared in Investment Executive, Canada’s leading newspaper for financial advisors, in September 1994. Since then he has written hundreds of articles on the full spectrum of emerging markets and has conducted more than two thousand interviews with emerging and frontier markets investment professionals.


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