With the Jakarta government unable to end the debt problems created by the 1997/98 crisis, even former market darlings such as PT Astra International have been running into problems
Of all the fascinating business stories to unfold in Asia in 2002, the tale of PT Astra International stands out.
Indonesia's dominant automaker and the eighth largest company in Jakarta's stock market has seen its shares soar 61% this year. Investors bought the company after creditors agreed in December to reschedule payments on more than $800m of foreign debt.
In recent days, though, investors have begun wondering about, well, all that debt. They initially loved Astra's plan to raise as much as 1.43 trillion rupiah ($160m) in a sale of new shares to help repay debt. Then they looked at the 26% gain in its shares this month and thought again. Does Astra's earnings potential support that rise? And all that debt?
Such debt challenges say as much about Indonesia's economy as they do about Astra. They are reminders that even well-run companies with decent market positions are held back by the nation's woes. Astra was a market darling a few years back because of its post-Asian crisis debt restructuring efforts. Now it is bumping up against Jakarta's failure to reform the economy.
Indonesia's sour investment climate is complicating Astra's efforts to sell non-core businesses to raise cash for debt payments. Many companies have struggled with debt since the 1997-1998 Asian financial crisis, during which the rupiah lost some 75% of its value. Indonesian companies owe overseas creditors more than $60bn, much of which turned bad after the crisis.
Astra's story is a reminder that the hype surrounding Jakarta's economic policies often does not match the reality. The key Jakarta Composite index is up more than 8% in 2002, while major indices in Frankfurt, Hong Kong, London, New York and Tokyo saw double-digit losses. The rupiah is the best performing East Asian currency, up nearly 17% this year.
Is today's optimism about Indonesia appropriate? If the events of the past 12 months are any guide, the answer is no. Jakarta sold just two of the nine banks it still needs to offload to recoup funds pumped into them during the Asian crisis. The money will go toward plugging a 34.4 trillion rupiah ($3.9bn) budget deficit in 2003. Delay could hold up instalments on a $4.8bn International Monetary Fund aid package.
The past year also offered myriad reminders of why many investors do not trust Indonesia and why economic prospects in the country are so grim. Take Manulife Financial. Its local unit, Indonesia's biggest life insurance company, was declared bankrupt for failing to pay dividends. The saga featured lawsuits in four countries and an Indonesian judge who confessed to 'gratitude money' for the favourable verdict.
Dodgy legal, judicial and corporate governance systems are depriving Indonesia of the growth needed to improve life for those living below the poverty line. For growth to flourish, foreign capital is needed. For capital to come, investors demand legal certainty and sound economic policies.
If president Megawati Soekarnoputri and her economic team understand this, it is not getting across. Sure, they realise these are issues with which they must deal. What they may not get is how many of Indonesia's problems are related to the lack of legal reform. And how erratic Indonesian justice appears from the outside.
It doesn't help that Indonesian officials are awash with credibility problems. In March 2002, central bank governor Sjahril Sabirin showed up for work a day after being sentenced to three years in jail for misusing state funds. The conviction was overturned six months later. Indonesia's attorney general is appealing that ruling. Sabirin is still running the central bank at a time when the IMF and investors want Jakarta to clean up its act.
Housespeaker Akbar Tandjung, a probable presidential candidate for 2004, was convicted of graft in September and sentenced to three years in jail. Yet he has stayed on and even continues to represent Indonesia abroad.
The Bali bombings in October also reminded investors that religious extremism is a growing risk in the nation with the biggest Muslim population. The tragic event took at least 190 lives and shook Jakarta out of denial about terrorist activities within its borders. The government still isn't doing enough.
Economic fairness is another big issue. Like too many resource-rich nations, Indonesians aren't enjoying the spoils. The nation boasts enviable stocks of oil, gas, rubber, timber, coal, copper, tin and other commodities, yet poverty continues to rise in a nation in which at least 40 million are unemployed. That is more than the population of Argentina. The have nots are overwhelming the haves, undermining the economy.
Indonesia may have come a long way since the Asian crisis but only a fraction of how far it needs to. Investors are focusing on the glacial pace of reform and on Jakarta's dodgy legal system. Even though the government is working to clean up its economic balance sheet, it is a lack of trust that may spook markets in the year ahead.
Bloomberg newsroom, Tokyo
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