INDONESIA: Policy matters

Indonesia’s resilience in the wake of the global crisis has won it many plaudits. But in a second term that has been dogged by corruption scandals and unseemly politicking, the pressing question is whether President Susilo Bambang Yudhoyono can push through his ambitious reform agenda

  • By Ben Bland
  • 03 May 2010
Email a colleague
Request a PDF

It was just 12 years ago that the Asian financial crisis brought the Indonesian banking system to its knees, sent the rupiah tumbling and sparked the messy downfall of President Suharto after 32 years of dictatorial rule. This time round the country has surprised many by emerging from the recent global crisis almost completely unscathed.

With the banking system on a much sounder footing, a huge domestic market of more than 230 million people to protect against external demand shocks, and a stable, adept government, Indonesia has been able to ride out the global storm in impressive fashion.

Indonesia was the third-fastest growing economy in the Group of 20 nations last year after China and India, growing by 4.5%, compared to 6.1% in 2008 and 6.3% in 2007. The government forecasts growth of 5.5–6% this year, a view shared by many economists.

This resilience, and the potential for further rapid growth that it implies, have not gone unnoticed.

Starved of attractive opportunities in sickly western markets, international investors have piled into Indonesia, which became the emerging market story of the last year. Investment bank Morgan Stanley encapsulated the buzz in a research report released last June, which suggested that Indonesia should be seen as the fifth member of the Bric nations, the emerging market powerhouses of Brazil, Russia, India and China.

Indonesia’s macroeconomic stability, large and expanding consumer market and its wealth of natural resources are likely to drive robust growth in the years ahead. But the country still suffers from widespread corruption, burdensome red tape, creaking infrastructure and a lingering hostility to foreign capital.

The key challenge, in President Yudhoyono’s scandal-ridden second term, is whether he can push the reform agenda hard enough to ensure that these roadblocks to growth are dismantled.


Indonesia’s remarkable recovery over the last decade is all about the return of political and macroeconomic stability.

The combination of low inflation, shrinking external debt, growing foreign exchange reserves and sustained economic growth has led to a structural decline in the cost of capital, says Chetan Ahya, an economist at Morgan Stanley in Singapore and one of the authors of last year’s influential report.

“Indonesia is experiencing a virtuous cycle of rising savings and investment,” he says. “When the cost of capital is high, business is about who can get a licence from the government or who has a relationship with a particular politician. But when the cost of capital is low you can see new guys emerge, and you will see a transition from a country being run by five or six main entrepreneurs to many more businesses emerging in the private sector.”

“This is the best momentum we’ve seen for 10 years,” says Faisal Basri, an economist at the University of Indonesia. “We’ve seen more and more hot money coming into the capital markets, but the trend for foreign direct investment is also increasing.”

Boosted by the inflow of foreign money, the benchmark Jakarta Composite Index has been one of Asia’s best-performing stock market indices over the last year or so, hitting record highs in April after more than doubling in value since its trough in March 2009.

The rupiah was Asia’s best-performing currency last year, rising 16% against the US dollar, a trend that has continued into the second quarter of this year. Since the start of the year, Fitch Ratings and Standard & Poor’s have lifted Indonesia’s sovereign credit ratings, with Fitch rating Indonesia’s debt at BB+, just one level below investment grade.

The government sees this optimism as a vindication of its sound economic management. “Growth is picking up, consumption is picking up, exports are robust, and investment will hopefully be picking up as well,” Mari Elka Pangestu, the trade minister, tells Emerging Markets.

But despite her enthusiasm, the US trained economist acknowledges that there are serious challenges ahead. “The big question is how we are progressing on developing policy to ensure that we can sustain growth,” she says.

Another concern, raised recently by the IMF and the ADB, is that the large inflows could destabilize emerging Asian markets like Indonesia when the flow inevitably starts to turn.

Perry Warjiyo, a senior official at Bank Indonesia, the central bank, warned in April that Indonesian stocks have entered “bubble” territory and that the bank may need to consider some form of capital controls further down the line. Bank Indonesia subsequently played down the probability of capital controls being imposed, and analysts agree that, despite the real risks of concerted outflows when the bubble bursts, such moves are unlikely.

“One of the biggest risks to Indonesia is likely to be capital flow,” wrote Arief Wana, head of research at Credit Suisse in Jakarta, in a recent note. “The risk of capital control is low, given that Indonesia is opting for an open market system.”


The re-election of Indonesia’s cautiously progressive president Yudhoyono with a strong personal mandate last July fuelled expectations that his administration would forge ahead with the economic and bureaucratic reforms that began after he was elected in 2004. But the robust nature of Indonesia’s political system and the fact that Yudhoyono’s Democrat Party only won 21% of the vote in the April 2009 elections has dashed hopes for rapid reform.

The House of Representatives, the main legislative body, has yet to pass a bill since it was re-elected. That is largely because it has been pre-occupied with investigating the 6.7 trillion rupiah ($740 million) bail-out of a small but troubled lender called Bank Century in 2008.

Most economists believe the rescue of the bank, led by Finance Minister Sri Mulyani Indrawati and Vice-President Boediono, who was then head of the central bank, was necessary to ward off the threat of financial contagion. But political opponents of Sri Mulyani and Boediono, both well respected technocratic reformers, have criticized the manner of the bail-out and made unsubstantiated allegations that the president and his ministers benefited financially from the rescue.

An official House of Representatives probe concluded in March that the bail-out was illegal but failed to provide convincing evidence of wrongdoing. The conclusion of that inquiry has partially drawn a line under the issue, although lawmakers are pushing for further probes, and the powerful Corruption Eradication Commission is conducting its own investigations.

In its recent quarterly emerging markets review, investment bank Credit Suisse said the affair “has politically weakened the government” and warned that Indonesia may be “entering a period of policy paralysis” that could “expose Indonesia to external financial and commodity price shocks in the medium term”.

One peculiar result of the political turbulence has been that Bank Indonesia has been without a governor since May last year, when Boediono stepped down to run for vice-president. Sri Mulyani was originally believed to have been lined up to replace Boediono but, facing the gathering storm over Bank Century, Yudhoyono decided it would be impolitic to reshuffle his pack at this stage.

“It’s certainly a strange situation,” says James van Zorge, a business consultant in Jakarta. “But it hasn’t caused too much concern among investors yet as monetary policy has remained solid.”

Despite such concerns, Kevin O’Rourke, a Jakarta-based political risk analyst and author of the Reformasi Weekly Review, believes it is increasingly likely that Boediono and Sri Mulyani – who have spearheaded vital reforms of Indonesia’s notoriously corrupt tax and customs directorates – will not be forced out.

“The battle over Bank Century represents the fundamental tensions between reformers and vested interests,” he says. “Indonesia was an extreme example of a patronage state for 500 years, with public officials focused on gaining economic rents to buy support. It was only with the fall of Suharto and the 2004 election of Yudhoyono as president that reforms got underway.”

With Indonesia persistently ranked as one of the more corrupt countries in the world by organizations such as Transparency International, it is vital that key reformers such as Sri Mulyani and Boediono are allowed to continue their good work, says Basri, who is a leading campaigner for further transparency.

A raft of high-profile corruption cases has hit the headlines in Indonesia recently, including that of a mid-level tax official called Gayus Tambunan, who allegedly collected more than $3 million from businessmen in exchange for fiddling tax assessments.

The seemingly endless stream of graft cases may look bad at first sight, says Van Zorge, a business consultant in Jakarta, but it shows the government’s determination to root out corruption and is testament to the fact that Indonesia has an unshackled press that is free to expose official abuses.


Foreign investors can try to side-step corruption by picking their local partners carefully, van Zorge and O’Rourke say, but the profusion of red tape is a hurdle that is less easily avoided.

With significant power devolved to Indonesia’s 33 provinces and government ministries often overlapping in remit, it can take years for companies (both domestic and foreign) to get approval for infrastructure and mining projects. US mining giant Freeport McMoRan Copper & Gold and Indonesian coal producer PT Indo Tambangraya Megah are among those that have been caught in disputes with the government because of uncertainty over their permit status.

Countless infrastructure and tourism projects – including an ambitious Dubai-led plan to transform the sleepy island of Lombok into the next Bali – have been delayed or cancelled because of the problematic land acquisition process.

And yet infrastructure investment is the key to Indonesia’s future growth prospects. “Investment in infrastructure has dropped to the equivalent of about 3.5% of GDP in the past three years, from 7% before the Asian crisis, lagging such investment in faster-expanding economies,” the ADB said in April in its development outlook report for 2010.

“This country needs infrastructure investment desperately,” says O’Rourke. “It will create jobs and bring down poverty: 14% of the population is still living below the poverty line of 6,500 rupiah per day.”

Gita Wirjawan, head of the country’s inward investment agency, says Indonesia needs $100–150 billion over the next five years to upgrade its ageing infrastructure, if it is to reach the government’s goal of 7% annual economic growth. Two-thirds of that investment will have to come from the private sector, he says.

Juan José Daboub, managing director of the World Bank, thinks Indonesia requires something more like $250 billion over the next five years, while some economists believe the country needs as much as $100 billion a year if it is to attain China-style economic growth of 7% a year and above.

But the flow of hot money into Indonesian stocks and bonds has yet to be matched by a surge in foreign direct investment. Given the long gestation period of road, rail and other infrastructure projects, it will take a year or more before it becomes apparent whether talk of renewed FDI has turned into concrete investments, says van Zorge.

The government, which hosted a large international infrastructure conference this April, is trying hard to drum up interest, particularly from China.

Trade minister Mari Pangestu hopes that US president Barack Obama’s eagerly-awaited return to Indonesia, where he lived for four years as a child, will help increase awareness among US investors after his visit in June.

“We’re open for business, and if you don’t come now, you’re going to miss the boat,” she tells Emerging Markets.

  • By Ben Bland
  • 03 May 2010

All International Bonds

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • 18 Jul 2017
1 Citi 244,235.70 910 8.87%
2 JPMorgan 223,767.95 1021 8.13%
3 Bank of America Merrill Lynch 211,276.97 750 7.68%
4 Barclays 166,062.82 634 6.03%
5 Goldman Sachs 162,877.27 537 5.92%

Bookrunners of All Syndicated Loans EMEA

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • 18 Jul 2017
1 HSBC 25,202.67 100 7.14%
2 Deutsche Bank 25,125.19 81 7.12%
3 Bank of America Merrill Lynch 21,836.07 58 6.18%
4 BNP Paribas 18,395.95 105 5.21%
5 Credit Agricole CIB 18,048.72 104 5.11%

Bookrunners of all EMEA ECM Issuance

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • 18 Jul 2017
1 JPMorgan 12,578.87 55 8.17%
2 Citi 11,338.07 71 7.36%
3 UBS 10,682.06 44 6.93%
4 Goldman Sachs 10,419.53 53 6.76%
5 Morgan Stanley 10,194.88 57 6.62%