[A-List] Indonesia: contrasting fortunes

["Keaney Michael" <Michael.Keaney@xxxxxx>]

Indonesia's cycle of subservience to the IMF
By Bill Guerin
Asia Times, September 10 2002

Despite growing "anti-IMF" sentiment among some Indonesian politicians,
last month's draft budget for 2003 was crafted to appease the
International Monetary Fund and ensure that the country continues to
receive the remaining tranches of a long-drawn-out US$5 billion rescue
program. This is the seventh letter of intent (LoI) between the IMF and
the Indonesian government.

However, the House of Representatives wants the government to revise
some budget figures to bring them more in line with current global
economic developments and the real needs of the economy. This follows
concern from businessmen who complain that the target proposed earlier
by the government would harm their businesses because of current
economic difficulties and shrinking export markets overseas.

The budget predicts that export growth will jump from 3 percent this
year to 7 percent in 2003, and the Bank Indonesia promissory note (SBI)
rate is predicted to fall to 13 percent next year from more than 18
percent last year.

Investing in SBIs, the main pastime for many banks during the past
couple of years due to its high interest rates, will become less
attractive. Such reductions in the central bank benchmark rate will
drive bank lending rates lower and boost lending activity as loans
became cheaper, which in turn will stimulate economic growth.

The rupiah is expected to trade at 8,700 to the US dollar. Crude oil is
expected to fetch $20.50 a barrel. Increasing political tension in the
Middle East, triggered by threats from the US to launch an attack on
Iraq, have boosted international oil prices to about $29 per barrel.

The fuel-subsidy cuts are expected to lead to a 20-25 percent hike in
fuel prices. This alone may contribute some 2 percent to overall
inflation.

A projected hefty 39 percent further reduction of subsidies on oil-based
fuel and electricity, married to a 20 percent increase in tax revenues,
will bring down the public-debt level. Total public- and private-sector
debt is now at a staggering $210 billion. Targets for gross domestic
product (GDP) growth of 5 percent and inflation easing off to 8 percent
seem a tad cozy given current business sentiment.

Extra revenue will come from slapping value-added tax (VAT) on
electricity and highway toll charges, and from higher property taxes,
the usual suspects as it were. The subsidy cuts will further restrain
the weak spending power of the average consumer. The economy continues
to be driven mainly by domestic demand, which contributes about 75
percent of GDP, but not from the pockets of the low-income groups, who
can scarcely afford anything other than sembako, the nine basic goods.
The head of the Indonesian National Front for Labor Struggle, Dita Indah
Sari, has said the government was placing more priority on pleasing the
IMF by withdrawing fuel subsidies than on attending to the people's
needs.

Recent increases in the minimum wage levels, if implemented, may have
some effect inasmuch as the workers can buy more cigarettes to boost the
rosy prospects of cigarette makers Gudang Garam and Sampoerna.

Most of the World Bank's financial assistance, an average of some $310
million per annum for the past three years, has been used to finance
social services and basic infrastructure for the poor. Outgoing World
Bank country director Mark Baird pointed out last month that though
"only" 13 percent of Indonesians were living below the poverty line,
large swaths of the population were living on less than $2 a day and
vulnerable to sudden misfortunes, such as sickness in the family.

Wardah Hafid, coordinator of the Urban Poor Consortium (UPC), defines
poverty more starkly from two perspectives: economic and social. She
says people are regarded as poor if the earnings of a family of three to
five members have less than Rp35,000 ($4) per week or Rp150,000 ($17)
per month. Socially, the poor are families that work in the informal
sector, such as pedicab drivers, street vendors or casual laborers.

The moneyed classes, on the other hand, continue to spend as if there
were no tomorrow. Credit cards are being touted all over the place,
every week there are major property exhibitions and Astra International,
the largest local car (and motorcycle) maker, reports strong sales.

Baird praised the government for sticking with the IMF program through
"constant setbacks and challenges to the discipline of the programs" and
put his pennyworth in for the patient, prescribing five immediate steps
to get back on the road to health. These included, not surprisingly, the
usual pat remedies of improvement in tax and customs administration and
a strong drive to sell Indonesia Bank Restructuring Agency (IBRA)
assets.

Indonesia joined the IMF in 1967 but it was not until the economic
crisis struck in 1997 that the government decided to ask for Fund
assistance. IMF reviews are always accompanied by in-depth scrutiny of
the government's financial position but never result in a magic medicine
for the debilitating sickness brought about by the national debt.

The country's total foreign debts in 2002 amounted to $130 billion or
Rp1.17 quadrillion and domestic debts reached Rp657 trillion.

Demands for flexibility on the part of the IMF make sense given that the
alternative is that Indonesia, without such external assistance, could
be forced, for the first time ever, to default on sovereign debt and
bring about a huge loss of confidence.

But in June National Planning Minister Kwik Kian Gie launched a bitter
tirade against the IMF, calling on the government not to extend the
relationship when the current country program expires in November.

The outspoken minister's attack led to much public debate and was billed
in Jakarta as reflecting a split within the cabinet. However, though
several legislators spoke in favor of booting out the IMF at last
month's annual session of the People's Consultative Assembly (MPR), in
the end the issue went nowhere. There was recognition that the cabinet's
policy makers have found it tough to generate rapid economic growth
under the prevailing circumstances, but the general gist of the debate
was that somehow the IMF was to blame, not the government.

Kwik was left fuming in the wings threatening to support a class-action
suit filed by lawyers against the IMF for recommending policies to the
Indonesian government that had caused the country's economy to
deteriorate further. Coordinating Minister of Economics Dorojatun
Kuntjoro Jakti (Kwik's boss) and Finance Minister Budiono were much more
pragmatic, and said little, at least in public, that could be taken as a
weakening of the president's support for a continuing IMF role in the
country.

Commission B wants the government to improve its bargaining position in
dealing with donor agencies and would draft a new economic policy law to
reflect this.

The target for the taxmen this year is Rp219.6 trillion and for 2003 a
whopping Rp260.8 trillion (US$29.2 billion), or 13.3 percent of GDP.

Given the notoriously inefficient and corrupt nature of the tax system,
the authorities are likely to go after the easiest catches, such as big
corporations, foreign companies and the existing individual taxpayers.
The normal practice of demanding official and unofficial (illegal)
payments to meet their tax-collection targets will further depress
business sentiment at a time when many Taiwanese and South Koreans are
making determined efforts to move their business out of Indonesia.

Both the Megawati Sukarnoputri administration and the previous one
talked up their privatization programs as if they were going to be
implemented in a real business arena, not one hindered at every turn by
those whose vested interests in retaining their state-owned-enterprise
"cash cows" and by the easy call that the family jewels should not be
sold off to greedy foreigners. Now that politicking has begun in earnest
for the 2004 election, these mischief makers may win the day.

Privatization targets will also be difficult to achieve given the
stalemate over some of the sales, including the privatization of PT
Semen Gresik and its subsidiaries.

The director general for state owned enterprises (BUMN) in a performance
report identified a mere 11 out of 161 BUMN as being commercially
sustainable, while 145 of the state-owned firms are running at a loss.

On the other hand, successful privatization of some state-owned
monoliths would be expected to drive them into healthy profits and
efficiency, rather than the cash cows of officials, politicians and rent
seekers. Waiting for their opportunity, these sophisticated white-collar
robbers are ready to leap out and cry foul, claiming that selling off
public companies is "unnationalistic" and "unpatriotic".

IBRA's recent success in asset auctions, though generating more than
Rp23.5 trillion, lost some of its gloss when it was disclosed that the
very people who owned them in the first place probably bought most of
these assets back - at an average 25 cents on the dollar.

And yet the budget projects a more than doubled level of income from
asset sales to the private sector for the 2003 fiscal year, an unlikely
scenario after State Minister of State Owned Enterprises Laksamana
Sukardi's own admission that in the first semester of this year's target
of Rp6.5 trillion, they only managed to bag Rp2 trillion.

The Investment Coordinating Board (BKPM) said two weeks ago that foreign
direct investment (FDI) in Indonesia during the first half of this year
dropped by 42 percent to $2.5 billion compared with the same period last
year, while domestic investment plunged by 70 percent to Rp11 trillion.

Without new investment Indonesia will forgo export growth and with
annual external debt servicing forecast to rise above $5 billion from
2005 on, the economy can never produce enough revenue to afford that
huge burden.

Another cause for concern is the amount of funds allocated to the
development program. Some Rp54.5 trillion was proposed, less than the
target for this year, and an amount insufficient to even start to
generate economic activity and growth and create more jobs.

Targeted spending for development for 2003 accounts for only 2.8 percent
of GDP, compared with 3.1 percent this year.

Getting the asset sales program back on track will be a lot more
difficult than just sitting back waiting for windfalls like the sales of
Telkom and Indosat shares on the secondary market - which were simply
passive privatization.

There is little demand for shares in Indonesian companies. Capital
Market Supervisory Agency chairman Herwidayatmo says there are fewer
than 50,000 domestic individual stock investors, compared with about 2
million in the heady days before the market collapsed in 1998.

Though a "belt tightening" budget is badly needed to prune the budget
deficit and improve fiscal sustainability, continued depressed growth
rates will mean such a standard prescription for economic recovery will
badly affect exports and investment levels.

It will also make it difficult for the government to conjure up some
interest in international financing to fund projects, create jobs and
get growth rates up.

The central government actually gets in more money than it pays out and
in the 2002 budget this surplus is almost $5.3 billion. But the reality
is a deficit equivalent to 2.5 percent of GDP. Internal interest
payments of Rp59.6 trillion ($6.5 billion) and external interest
payments of $3 billion turn the surplus into a deficit of $4.2 billion.

This is the crux of what the IMF-Indonesia relationship is all about.
The interest on foreign and domestic debt is a stranglehold that forces
Indonesia to seek new loans in a vicious circle that traps the
government within a master-servant relationship with the IMF and other
international donors.

This staggering debt and lack of room to maneuver suggest that an
appropriate prognosis of the suffering ahead is that there will be still
be much more pain before gain. Though the business community and the
economy as a whole will feel this pain, the poor and impoverished will
bear the brunt. 

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Indonesia in $1.3bn London Club debt deal    By Shawn Donnan in Jakarta
Financial Times; Sep 07, 2002

Indonesia's central bank yesterday announced the rescheduling of $1.3bn
(EUR1.4bn, ý833m) in loans from the London Club of commercial
creditors, just a day after Standard & Poor's raised the country's
sovereign credit rating.

The rescheduled loans were disbursed between 1995 and 1997 and had been
left unpaid in the wake of the Asian financial crisis.

S&P pointed to the London Club loans when it lowered Indonesia's credit
rating to selective default after Bank Indonesia reached an agreement
with the Paris Club earlier this year.

On Thursday the ratings agency lifted Indonesia's credit rating to CCC+
but warned that the country would likely need to reschedule further
foreign debts next year.

Economists consistently identify Indonesia 's debt burden of $150bn as
one of its most pressing economic issues as it struggles to recover from
the 1997 financial crisis and its turbulent introduction to democracy
following the 1998 ousting of former president Suharto.

The government of Megawati Sukarnoputri boasts that it has managed to
reduce the country's debt-to-GDP ratio from 106 per cent in 2000 to less
than 80 per cent this year.

But according to Drajat Wibowo, a leading economist, the policy of
extensions is still leaving Indonesia with heavy servicing burdens in
the short-term. This year alone, 44 per cent of tax revenues would go on
servicing debts, he said, and that ratio risked rising steeply.

The London Club agreement announced yesterday gives Indonesia an extra
17.5 years to repay the principal on loans of $242.9m and Y6.5bn ($55m,
EUR56m, ý35m ) obtained in 1995.

It also provides an extra 10 months to repay the principal on two
separate loans of $500m issued in 1996 and 1997.

In return, Bank Indonesia said it had agreed to make previously unpaid
interest payments that had been due in June.

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Chevron, Texaco to invest in Indonesia
Asia Times, September 10 2002

JAKARTA - Chevron and Texaco, the owner of PT Caltex Pacific Indonesia
(CPI), will invest up to US$450 million to develop Indonesian oil and
gas oil fields next year.

Vice President of Chevron-Texaco Petroleum Inc George L Kirkland said
the additional investment will be needed to continue development of CPI
oil fields.

CPI, the country's largest oil producing company, turns out
550,000-560,000 barrels of crude oil per day.

Kirkland said CPI also plans to develop geothermal energy by building a
new geothermal power plant .

The project, however, still needs further studies, he said as quoted by
the newspaper Bisnis Indonesia. 

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Army's role queried in gold mine killings
By Shawn Donnan and Tom McCawley in Jakarta
Financial Times; Sep 06, 2002

When gunmen ambushed a convoy of foreign workers attached to the massive
US-owned Grasberg gold and copper mine in the troubled province of West
Papua last Saturday, the Indonesian military was quick to blame
separatist rebels.

In the days since, it has launched a new offensive in the area of the
mine, operated by New Orleans-based Freeport McMoRan Copper & Gold. The
goal, ostensibly, is to find gunmen who killed two American teachers and
an Indonesian colleague, and wounded 10 others.

But diplomats, human rights workers, and other analysts have expressed
doubts about whether the members of the Free Papua Organisation (OPM)
could have undertaken such an attack.

More and more observers believe the military, with its long chequered
history, may have had a hand in the raid. At a time when its stock is
diminishing elsewhere in Indonesian society, analysts say, the military
may be the only institution with something to gain. Especially if it
uses the attacks as an excuse to reinvigorate its campaign in Papua, one
of a number of provinces where it is fighting separatists.

Indonesian officials have blamed the attack on the rebels, saying it
suited the OPM to destroy the confidence of international investors in
Indonesia's security environment. But analysts say the attack was out of
character for the OPM, which is more renowned for its use of bows and
arrows than its tactical wherewithal. In the four decades it has been
fighting for independence, the OPM has never killed foreigners. While it
has kidnapped westerners, it has always released them relatively quickly
and unharmed.

The movement would also have nothing to gain by attacking US citizens in
the post-9/11 climate and Papuan activists have been quick to condemn
the attack.

The OPM commander, Kelly Kwalik, has denied being involved and had been
discussing a ceasefire. Those who know him also question whether his
band had the firepower for such an ambush.

"I know Kelly Kwalik and his men," said John Rumbiak, a West Papuan
human rights advocate. "They only have two guns! They only have arrows
and bows!"

Mr Rumbiak believes the attacks may have been motivated by a desire to
play to the US and its war on terrorism as Washington and Jakarta
discuss restoring military ties. If that was the objective, the gunmen
may have succeeded. US diplomats dubbed the attack "an outrageous act of
terrorism".

If the military was involved, the attack could also be a sign of fraying
relations between Freeport and military stationed at the mine, which is
both the world's largest gold and copper mine and Indonesia's single
largest taxpayer.

Denise Leith, the author of a forthcoming book on Freeport's
relationship with the military, said the company and the soldiers it
pays to provide security have often had a tense relationship. Human
rights activists have long blamed Freeport's close ties to the military
for abuses around the mine. But the military, Mrs Leith said, also has a
history of pilfering from the company and reacting badly whenever it
tried to stop them. "When Freeport annoys the military (the military)
stage an incident to prove to Freeport that they can't do without the
military," she said.

However, the economic damage may already have been done. Direct foreign
investment approvals more than halved to $2.67bn in the seven months to
the end of July, against the same period last year.