IMF approves $450M for Indonesia (fwd)

[Robert Weissman <rob@essential.org>]

June 9, 1999
Investors Give Vote of Confidence
After Indonesia's Peaceful Election
By JAY SOLOMON
Staff Reporter of THE WALL STREET JOURNAL
JAKARTA, Indonesia -- Investors are registering a major vote of confidence
in
Indonesia's freest election in nearly a half century.
The stock market rose 12% Tuesday, the International Monetary Fund approved
$450 million in aid, and local businessmen talked optimistically of
restructuring debt-laden companies in a more-stable political environment.
"Political stability is the only chance for companies to survive, and the
first major hurdle was cleared" in Monday's parliamentary election, said
Indra Widjaja, president-director of PT Bank Internasional Indonesia, one
of
the largest private banks in the nation. "Interest rates and the currency
should stabilize as political risk subsides."
Business investments in Indonesia have largely been put on hold in the
months
heading into the parliamentary vote. The rioting that swept the country
last
year -- and forced former President Suharto's resignation -- remained fresh
in people's minds, and the assumption was that politics, combined with
simmering ethnic and religious tensions, would set off another round of
unrest during the campaign. Foreign-investment approvals plunged nearly 90%
in the first 10 weeks of 1999, compared with the year earlier.
But the euphoric three-week campaign period ended up looking more like a
rock
concert than a war zone -- large-scale unrest never materialized. Monday's
voting was calm and orderly.
Concerned About Stability
Financial markets responded. Jakarta's key stock index rose 12% Tuesday to
a
22-month high, while the nation's currency, the rupiah, has strengthened
5.6%
since Friday, trading late Tuesday in Asia at 7,660 rupiah to the dollar.
Traders said the market gains were fueled by "panic buying" driven by a
perception that the political risks long associated with Indonesia were
abating.
"It's all about country risk in Indonesia, and with the election over this
risk subsides," said the Singapore-based trading chief at a U.S. brokerage
house. "People are not overly concerned about who's in charge of the
country
-- only that it's stable."
The IMF also placed its stamp of approval on the election by endorsing the
$450 million loan late Monday in the U.S. While the fund never explicitly
said it was withholding loans to Indonesia until after the election -- as
the
World Bank did -- it did delay a meeting that could have seen the funds
disbursed earlier. Many observers saw this as the IMF pressing President
B.J.
Habibie's government for a free and fair vote.
Recovery Outlook
Stanley Fischer, the first deputy managing director at the IMF, voiced
optimism Monday in Washington over Indonesia's prospects for economic
recovery. "With inflation falling and the exchange rate stable, there is
room
to reduce interest rates further, thus improving prospects for recovery,"
Mr.
Fischer said. The IMF official also said Indonesia's economic growth was
likely to become positive by the end of the year, while inflation would
fall
to single digits.
But many financial analysts still are cautious about Indonesia. On the
corporate side, they say that many Indonesian companies remain insolvent
because of the combination of a weak rupiah and billions of dollars of
debt.
Although interest rates have been falling -- one-month central-bank paper
is
now yielding 25%, down from 40% earlier in the year -- it is still too
expensive for most companies to raise financing.
The idea that Jakarta's main index, now at 687, is within striking distance
of its precrisis high of 740, hit in July 1997, is a portent of an
overcooked
market, they warn. "The prices can't hold from a fundamental point of
view,"
said economist Neil Saker of SG Securities in Singapore.
Some observers warn that there could still be political tension ahead,
despite the success of the actual vote. A fractious coalition government
could emerge, making implementation of painful economic reforms all the
more
difficult.
'Very Significant Event'
But Indonesian businessmen still say the peaceful vote is significantly
improving the investment climate.
Harun Hajadi, managing director of PT Ciputra, a major Indonesian property
firm, said his attempts to restructure the company have been undercut by
political risk over the past year. Foreign investors he courted balked
because of perceived political and social risks; those who did consider
projects demanded exorbitantly high returns. Sales of Ciputra's private
homes
fell 70% from precrisis levels, to 3,000 units last year, as soaring
interest
rates killed off consumer demand, Mr. Harun said.
But now he sees his business fortunes improving, mainly as a result of
falling interest rates. "The peacfulness of the election was a very
significant event," he said.
Mr. Widjaja of Bank Internasional Indonesia, who is in the process of
recapitalizing the bank, also said the calm will help him, too. Indonesian
banks have been crushed by negative spreads -- which means they pay
borrowers
higher rates than they earn from deposits. "This situation should improve"
as
a result of the vote, he said.
Perhaps most importantly, the peaceful votes could woo back Indonesia's
ethnic-Chinese business class, whose shops and homes bore the brunt of much
of last year's violence. Though the memories of last May's rioting remains
fresh in their minds, and some continue to keep their families overseas for
security reasons, many say they feel the security situation in the country
is
starting to improve.
"During the past year I lost half of all I owned," said Richard Hakim, an
ethnic Chinese businessman who owns the toiletries producer PT Kintamolek
Masa. "Things can only get better."
---------------------------------
June 9, 1999
Heard in Asia
Indonesian Stocks' Surge
Draws Praise of Analysts
By DOUGLAS APPELL
Staff Reporter of THE WALL STREET JOURNAL
Investors surprised by the peacefulness of Indonesia's general election
snapped up shares in Jakarta on Tuesday, propelling the market's main index
to a 12% gain. Is that euphoria an opportunity to cash out or a signal to
get
in?
On balance, analysts say it's better to be in. Investors have to be
selective, but with interest rates falling and growing signs that the worst
of the country's instability is over, it has become more dangerous to be
out
of the market than in, says one Singapore-based institutional salesman.
There was a bit of "irrational exuberance" Tuesday, and some investors who
bought earlier this year at lower levels locked in their profits by
selling,
says Andrew Pearson, the Hong Kong-based sales director with BNP Prime
Peregrine Securities.
Longer-Term Prospects
Such selling could send the market lower in the next month or two, but
longer-term investors, such as pension funds, who have stayed clear of
Jakarta can still buy shares at current levels and expect healthy gains
over
the next six to 12 months, he says.
With prices of many of Jakarta's large-capitalization stocks having run up
sharply in the past month or so, it may be time to sell some of those
holdings and move into second-line shares that have posted more modest
gains,
some analysts say. Banking shares could be a victim of that rotation.
One Hong Kong-based hedge-fund manager said the market's surge has brought
many of his Indonesian holdings close to his company's target levels. But
rather than sell out, he says he is looking to reshuffle his holdings,
cutting back on big banks amid worries that moves to raise capital by
issuing
new shares will dilute earnings per share. He is also shifting to companies
with heavy debts that stand to benefit from falling interest rates, such as
United Tractors and Asahimas Flat Glass.
For longer-term investors, "there's a lot of value to be found in mid-cap
and
small-cap stocks," that brokers largely ignored over the past two years,
says
Qaisar Hasan, the head of research with Jardine Fleming Nusantara in
Jakarta.
For example, he says, pharmaceuticals concern Tempo Scan Pacific is now
trading at over 2,000 rupiah (25.9 cents) per share, up from the 350-rupiah
price of two months earlier, when Jardine recommended it, he says.
A Jakarta-based fund manager agrees. Smart money should increasingly look
at
the second-line stocks that foreign brokers shunned because they were too
small to generate any business. That situation "is changing very rapidly,"
he
says, and buying companies such as United Tractors now, before brokers
begin
looking at them again, will yield profits.
'Still Pretty Dire'
Not everyone is convinced that Tuesday's surge marks a coming-out party for
Indonesia's market after roughly 18 months in the region's economic
isolation
ward. One senior fund manager in Edinburgh says he is sympathetic to the
idea
that Indonesia is on the mend, but "the economic situation is still pretty
dire," he says, adding that he will watch developments in the coming months
before putting money back into Jakarta.
Jardine Fleming's Mr. Hasan says investors with a shorter time horizon may
want to stay on the sidelines for a few days to see the tallies of Monday's
vote. Early results suggest that opposition party leader Megawati
Sukarnoputri's Indonesian Democratic Party-Struggle, or PDI-P, dominated
President B.J. Habibie's ruling Golongan Karya Party, or Golkar -- a result
that could boost the prospects for the formation of a stable government.
But
after votes are tallied in rural districts, where Golkar support is
stronger,
the situation may appear more muddled, he says.
"We're not out of the woods yet," says a Singapore-based fund manager, who
adds that it will be months before a new president is elected and new
economic policies can be hammered out.
Still, many investors expect more good news to come out of Indonesia than
bad
news. Against that backdrop, long-term investors will increasingly be
willing
to build up and hold on to their positions in Indonesia, says Colin Quek,
the
director of Prudential Portfolio Managers Singapore.
Harder to Ignore
And as the market rallies, it becomes harder to avoid, notes the
Singapore-based institutional salesman. Early this year, when Indonesia
counted for a mere 1.4% of the Morgan Stanley Capital International
benchmark
index for Asia, excluding Japan, it was easy to ignore.
But thanks to the market's 70% surge over the past two months, it now
counts
for more than 3%. If it becomes 4% or more, investors will have to scramble
to put more money in Indonesia or risk underperforming in relation to that
index, he says.
The Jakarta-based fund manager agrees. Not only will foreign investors be
looking to boost their holdings here, but domestic institutions are likely
to
be adding to the rally as well. As banks get infusions of capital from the
government, with little likelihood of strong demand for loans anytime soon,
they will channel that money into the market, he predicts.
And with more foreign money coming into the country, he says, the rupiah
should regain some ground, so it makes sense to stay in Indonesia even if
the
market stalls for a while. "This currency is not going to go south
anymore."
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