Indonesia - Indonesia Could Be the Next India… Unfortunately

JAKARTA – Indonesia could be on the way to becoming the next India, investors say. And that’s not a good thing.

Indonesia has climbed to near the top of many economic rankings in Asia, just below China. In the last six months it has outpaced India’s growth as its gross domestic product expanded an impressive 6.4%, despite growing global jitters about debt problems in Europe. During the same period Indian growth slowed to 5.7%.

While it may be Indonesia’s time to shine, economists and executives warn that it has a lot of the same problems that have doused and possibly derailed India’s success. India’s gross domestic product expanded only 5.3% in the last quarter, its slowest growth in nine years. The country is suffering from the government’s inability to do more to improve infrastructure, rein in spending and push through reforms to create new economic opportunities, all of which is scaring off foreign investors.

“Stubborn inflation and below-trend growth and rupee depreciation are symptoms of the underlying economic imbalances due to a combination of policy inconsistencies and a comatose government,” said Rajeev Malik, senior economist at CLSA Singapore, in a report this week entitled “Paying the Price of a Comatose Government.”

On key policies, Indonesia’s government also often seems like it is in a coma, investors say. It has been unable to implement basic policies – such as raising subsidized fuel prices, a move economists say is necessary to keep the government’s financial affairs in order – or build the basic infrastructure the country desperately needs if it wants to keep growing at a rate that will help improve the lives of its more than 240 million people. Major unresolved bottlenecks at ports, airports and on highways are slowing commerce down and adding significantly to the cost of doing business in Southeast Asia’s largest economy.

Critics complain that the only time bureaucrats and lawmakers seem to wake up is to make policies expected to spook local and foreign investors and companies. On Thursday, Bank Indonesia suggested it planned to cap single-company shareholdings in banks at 40%, which may very well squash a $7.3 billion take-over bid for PT Bank Danamon by Singapore’s DBS Group Holdings – even though many economists believe the deal is good for Indonesia’s banking sector.

Meanwhile, different ministries have been slapping new taxes and ownership rules on mining, one of the most crucial sectors for Indonesia’s growth.

Government officials have responded to the complaints by saying they’re working hard to break through red tape to build more infrastructure, with progress just around the corner. And they say the new taxes and other rules are designed to ensure the country better enjoys the fruits of the country’s latest economic boom.

Either way, while it has been centuries since the archipelago was run by Hindu rulers, Indonesia’s “Indianess” is increasingly being reflected in how its stock market and currency are sliding along with India’s. Earlier this week, Indonesia’s stock exchange hit its lowest level in five months and the rupiah has nosedived.

“The Indonesian rupee and Indonesian rupiah are both facing significant depreciation pressures, due to their domestic-demand-driven economies experiencing inflationary pressures, a deterioration in their balance of payments and political uncertainties,” said Goldman Sachs in a report this week. “In India, the losses in crucial state elections and pressure from allies has left the Congress-led government with little room to tackle unpopular reforms. In Indonesia, we note the recent U-turn on fuel subsidies; as well as the recent ramping up of nationalistic sentiment.”

In the popular book “Eat, Pray, Love,” the author travels from Europe to India to Indonesia. Investors are hoping the recent rash of economic troubles and unpopular policies doesn’t travel the same route.

Eric Bellman

http://blogs.wsj.com/

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