It has been barely 20 months of democratic policy and Indonesia is facing the impediment of politic...
It has been barely 20 months of democratic policy and Indonesia is facing the impediment of political and economic instability. With President Abdurrahman Wahid's possible impeachment approaching on 1 August, the country is going haywire, as evidenced by social protests and economic turmoil.
Alastair Campbell, investment manager of the Asia Pacific Desk at Aegon, says: 'Everyone can see that Wahid is likely to go down for public corruption, however, he still has not resigned and is calling a general election. That is causing confusion, especially to international investors. Hence, Indonesia represents a small part of the index benchmark at Aegon and it will probably be a while before we can consider investment in the region.'
Campbell adds that the political situation in Indonesia is causing the most detriment and, as a result, the IMF loan is being withheld.
If Wahid leaves, the vice president, Megawati Sukarnopurtri, will be taking his place. Garry Mackenzie, director of Asian securities at Clerical Medical, says: 'There is an element of religious insecurity, when it comes to Megawati becoming president. Having a woman as president, conflicts with Muslim belief so it remains to be seen whether she will be accepted as the country's leader. Moreover, she is untried and no-one really knows how she is going to run the country. She has rarely voiced any of her policies.'
The country is banking on an IMF loan to get out of destitution. During the Asian crisis, Indonesian banks were nationalised in order to avoid mass closures. Today, the banking system is lame and is at the top of the government's list for restructuring. However, with a budget deficit looming at 6% for this year and pressures from the IMF, radical measures have been taken. Subsidies on oil were abolished sending prices sky high while electricity and cigarettes are soon to know the same fate.
'It was ludicrous to subsidise products like petrol. In Indonesia, the bottom end of the market does not use petrol. Abolishing subsidies sends out a sign to the IMF and the World Bank that Indonesia is prepared to make tough decisions,' says Mackenzie.
Political and economic uncertainties have increased the buoyancy of inflation and weakened the Rupiah. The sapped currency pushed the central bank to raise interest rates. Mackenzie comments: 'Interest rates has been the devil of the deeply sea. The central bank, in order to protect the currency, raised interest rates, but at the same time this puts pressure on corporates. There is insecurity in the Indonesian economy.'
fund manager comment: Clerical Medical
Argentina has effected a quasi-devaluation. The lights have gone out in Brazil at the same time as interest rates have gone up, and commodity prices have started heading south again. So, why is the Latin region showing positive returns this year?
Much of the basis for the region's returns this year has come from Mexico. Mexico's 20%+ return this year far exceeds that of Chile's sub 10% move, and is in stark contrast to Argentina's 0% and Brazil's 20% fall. Part of Mexico's strength may be based upon its strong ties with the US, which somewhat insulate it from the travails of the rest of the region.
But the casual observer will have noticed that the US has its share of problems at the moment ' witness the S&P return highlighted above. Mexico's reliance on export growth to the US is well known, and its auto sector in particular must be reeling from the slowdown north of the border. In addition, a weakening oil price is not benefiting Pemex, the country's single largest exporter. True, local interest rates have fallen substantially this year in contrast to the experience across most of the rest of the region, but this has also been the case in the states and has had little material impact on markets there. What has really driven the divergence in performance was the announcement in May that Citigroup would acquire Mexico's leading banking group ' Banacci.
The bid was at a considerable premium to the price of what is one of Mexico's largest index constituents, and so prompted a strong rally in the market. The $12bn deal also provided a massive boost to Mexico's foreign direct investment, thus buoying the currency.
From the Mexican market's response though, you could almost be forgiven for thinking Citigroup had actually bought the country, which would probably be news to Citigroup's shareholders.
James McLellan is fund manager at Clerical Medical
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