Thursday, August 26, 2010

Indonesia to keep shining.....

Indonesia to keep shining.....if CIA/MOSSAD and DIA/OSP keeping hands off....

By Robert M Cutler

MONTREAL - Jakarta's principal stock market index has more than doubled since President Susilo Bambang Yudhoyono won the July 2009 presidential elections with a margin that made a run-off unnecessary.

Yudhoyono's comfortable victory came three months after his Democratic Party coalition won 314 of the 560 seats up for election to the People's Representative Council, the country's legislature. The stage was set for a period of political stability that has encouraged investment by local and overseas companies, including South Korean steel giant POSCO, and consumer spending.

The economy in the second quarter grew 6.2% compared with a year earlier and expanded at a rate 2.8% faster than in the previous three months, according to the country's Central Bureau of Statistics. Yudhoyono has set a 6.6% goal for annual economic growth, and the consensus is that this will probably reach at least 6.0%.

Exports, capital investment, and the consumer sector all contributed to the advance. Domestic consumption, though, was the main driver, accounting for over two-thirds of the country's growth, an atypically high figure for the region. Domestic automobile and motorcycle sales are a backbone of the consumer spending statistic, and gains there translate into stock market strength - local automaker Astra International accounts for no less than 8% of the capitalization-weighted Jakarta Stock Exchange Composite Index (JCI).

The Indonesian stock market has been one of Asia's stand-outs, with the JCI powering up from 1,111 last October to 3,141 as of Wednesday's close. This growth is equivalent to a compounded rise of almost 4.84% per month consistently for nearly two years. The performance includes a recovery from 2,614 near the end of May to the present level, itself equivalent to a 1.42% compounded weekly increase over the last three months.

The JCI surpassed its previous (mid-January 2008) all-time high of 2,810 in early April this year, then fell back, passed it again in early June and has not looked back since. It has been showing short-term strength for the last two-and-a-half weeks, and this is continuing. That previous all-time high came from the basis of a level at 361 in mid-October 2002, itself a record of over five years of consistent growth of 3.37% compounded monthly.

The JCI has significantly outperformed the country’s other major market index, the LQ45, which is (as Bloomberg News explains) "a capitalization-weighted index of the 45 most heavily traded stocks on the Jakarta Stock Exchange", whereas the JCI is "a modified capitalization-weighted index of all stocks listed on the regular board of the Indonesia Stock Exchange". For example, over the past five years, the JCI has vaulted 216%, but the LQ45 is up "only" 174% during the same period.

Jakarta's stock market capitalization remains relatively small, given the size of the country. The market cap is only one-third of Taiwan's even though Indonesia's population is 10 times as large. At the same time, the country has well-established regional and global political links through membership of organizations such as the Association of Southeast Asian Nations and the Group of 20.

Like many Asian economies, Indonesia's is less financially intermediated by the international banking institutions that find themselves under continuing, if no longer immediate, threat. Its investment regulations are still seen as unfriendly in comparison with many Asian peers, and administrative steps have been under way for some time to improve the climate for foreign capital. Endemic red tape, corruption, and poor infrastructure complicate attempts to realize the potential of the country’s natural resource base.

HSBC economist Wellian Wiranto nevertheless remarked this month that "[F]oreign direct investment may be contributing more and more to growth, judging from the gathering interest among international companies seeing Indonesia as a big market with a large pool of labor force, right where the raw materials are", as quoted by India's Economic Times. POSCO, South Korea’s largest steelmaker, is only one of the latest to sign an agreement with an Indonesian firm for a new industrial plant (a steel mill in West Java with Krakatau Steel).

Relatively low interest rates are spurring consumption, although with annual inflation reaching a 15-month high of 6.22% in July, up from 5.05% a month earlier, those rates may be increased. Still, companies are plowing profits back into investment.

The only cause for worry would be the increasing unemployment rate, although even this has not worsened as much as feared. About half of the country's total employment remains in the agricultural sector, although it is not clear what proportion of those formally counted in agriculture may migrate seasonally to the cities. The high degree of informal-sector employment is a worry to economists and reformers, but it does provide a cushion of sorts.

At the same time, the country's export structure has the advantage of being more oriented toward Asian economies and therefore less dependent upon the vagaries of the Western consumer resilience. That does not make it immune from following global markets in the wake of periodic financial-crisis downturns, but these tend to be transitory waves of market emotion and not based on fundamental economic realities.

For these and other reasons, it is foreseeable that the Jakarta stock market will continue its stellar performance, other things being equal, even if it suffers the occasional inevitable hiccup. In the short term, for example, it is looking a bit overbought, even if volume has lately been impressive and a number of short-term technical indicators remain favorable. It is attempting to confirm its surmounting of a long-term ascending-tops trend line while it is at the same time at the top of a medium-term ascending-tops trend line.....

Lack of 'moral courage' in Indonesia....???
By Gary LaMoshi

DENPASAR, Bali - Six years ago, academic Greg Barton understood why Indonesian moderates were reluctant to clash with the country's radical Islamist minority.

Then, Barton contended that the public relations savvy of Muslim extremists combined with ambiguous election results, varied platforms of so-called Islamic parties, and political coalition-building made it difficult for moderates to challenge them effectively. "With the objective data painting such a complex picture, is it any wonder that it has elicited such a confused response?" the author of Indonesia’s Struggle: Jemaah Islamiyah and the Soul of Islam he said. (See A mainstream embrace for extremism, Asia Times, December 11, 2004).

Now, Barton has a simpler answer for the failure of Indonesia's
leadership to confront radicals: a "lack of moral courage" that starts at the very top of the government.

Herb Feith Research Professor for the study of Indonesia at Melbourne's Monash University, Barton's authorized biography of Indonesia's first post-reform president Abdurrahman Wahid won him notice beyond academic circles in Australia and Indonesia. His next book, Islam’s Other Nation: Faith in a Democratic Indonesia, is due out next year.

A former faculty member at the Pentagon's Asia-Pacific Center for Security Studies in Hawaii, where he remains an adjunct, Barton also currently serves as director of the Center for Islam and the Modern World and deputy United Nations Educational, Scientific and Cultural Organization chair in Interreligious and Intercultural Relations-Asia Pacific at Monash. His next project is to examine progressive Islam and social currents in Indonesia and another pivotal secular Muslim majority nation, Turkey.

He spoke to Asia Times Online while visiting Indonesia as a member of the inaugural Presidential Friends of Indonesia study program that brought academics from 15 countries to Yogyakarta and Jakarta. Interview excerpts follow:

Asia Times Online: Since we last talked six years ago - to paraphrase your book's title - who's winning the struggle for the soul of Islam in Indonesia? Under President Susilo Bambang Yudhoyono, are things moving in a positive direction, negative direction, or sideways?

Greg Barton: In general, things are moving in a positive direction. There's a moderate mainstream center that's holding. There's an equilibrium, but it's a dynamic equilibrium. We're going to see a constant state of contestation. There's going to be a struggle between groups to see who controls the middle.

ATOL: What are signs to watch for indicating which side is winning?

GB: If we saw progressive groups being inhibited, that would change the dynamic.

ATOL: What would indicate that progressives are being sidelined?

GB: The anti-pornography law that was passed over objections from non-Muslims is one example. There's also a proposed anti-blasphemy law. In Pakistan, the anti-blasphemy law has been used in a pernicious, cynical fashion. These laws can be used to stir up a mass reaction.

Indonesian activists look north at Malaysia, which has laws against conversion from Islam and apostasy. Malaysia has religious police going around during Ramadan enforcing the fast. It has religious courts that take precedence over civil courts for Muslims. That's the sort of thing that worries Indonesian moderates. Indonesia isn't going to become a Muslim state like Iran.

ATOL: Is the trend toward Islamization growing in Indonesia?

GB: If you look at the elections, PKS [Prosperous Justice Party] got 9% of the vote. The preeminent radical Muslim party hit a glass ceiling. When it comes to hard choices, people don't choose radicalism.

However, a large portion of society is sympathetic toward some of the radicals' positions. A majority of Indonesian Muslims support banning Amadiyah [a breakaway Muslim sect]. Because of that support, the government is reluctant to crack down on FPI [the Islamic Defenders Front that uses violence against its targets in the name of Islam].

If the government had the moral courage to stand up to these guys, it wouldn't face a broad backlash, in my opinion. These groups have very limited support - less than 10%.

ATOL: So why doesn't the government stand up to them? What is behind that reluctance?

GB: I believe it's a lack of moral courage. The president is a decent man, but not courageous politically. Also, his cabinet includes members of Islamic parties, and his governing coalition is dependent on PKS and it manages to wield its influence in disproportion to its numbers. If he [Yudhoyono] did speak up, he'd find society on his side.

It's not just the president - police and local politicians are also reluctant to act against radicals. The problem is not unique to Indonesia. Look at the issue of gun control in the US. Privately, people and politicians acknowledge it's necessary. But they don't want to face the consequences from a vocal minority. The minority is very clever at bringing their power to bear on the debate.

ATOL: Do you fear that the reluctance to speak out could lead to a dictatorship again, this time under the flag of Islam?

GB: First, I think you have to remember that the Suharto regime didn't happen in a vacuum. It was the Cold War era. Suharto came to power with the backing of the US, and its allies supported it.

Today in Indonesia, the level of education is higher, so there's less likelihood of people simply following along. Many people do speak out today against intolerance.

If we did see an extended period of political uncertainty, it could lead to a politician playing the Islamic card. It happened in Malaysia. [Former premier] Mahathir Mohamad was an ultranationalist who shifted to religious language, not because he believed it, but because it was convenient and served his purpose.

In the realm of secularist national politics in Indonesia, if someone tries to play the populist card, it can do damage. But populist politics are a regular feature of democratic society everywhere in the world. It's not unique to Indonesia.

ATOL: In our interview six years ago, you said, "Thoughtful engagement with the Indonesian police and, arguably, with carefully chosen sections of the military is necessary and important, but discredited units such as Kopassus [an elite commando unit frequently used to quell political dissent under former president Suharto] should be avoided at all costs."

As I'm sure you know, last month the US resumed military ties with Kopassus. What do you think of the decision?

GB: It's one of those areas where the devil is in the details. Things have changed with the armed forces, there has been a shift. The military has decisively moved away from politics. There has also been a generational change, a new crop of officers that weren't part of the Suharto era. It's good that they have international engagement as part of a positive drive toward professionalism.

But there needs to be careful scrutiny and control of who participates. The main thing is that it's not a free-for-all.

ATOL: You're doing research about Turkey and comparing it with Indonesia. What are some of your key findings?

GB: It's good to see that the two countries are drawing closer. They have a cultural connection. Islam came to Indonesia via merchants from India. But their Islam was a very Persian form of Islam. Islam in Turkey is also very Persian. It's a quiescent, pluralist form of Islam that helped both countries evolve into secular democracies.

Over the past 15 years, Turkey's government has gotten more representative. Society is generally socially conservative and religious, and government now reflects that.

Indonesia and Turkey are stable, secular democracies where Islam plays a major role in public life. But in both countries, people don't want an overt link between state and religion. That augurs well for the future.

There's been a perception that the Arab world is the center of Islam. Turkey and Indonesia represent progressive developments on the geographic periphery of Islam.

ATOL: But on the other hand, Indonesia has seen a recent spate of church burnings.

GB: It's shameful that Lutheran Bataks [people from the Lake Toba region in Sumatra] can't worship in peace in Jakarta. As long as the government stands up to these fringe groups, it's fine. When it doesn't, there's trouble. Thuggish behavior is from guys trying to see how far they can go.

The overall sentiment here is to live in harmony but we're seeing some cowardly behavior from the president's office on down. What's comforting is that some of the most strident voices speaking out for tolerance are from Muslims as well as religious minorities. There's never going to be a situation where these sorts of things are not contested. What's important is that progressive elements speak up and the majority comes onside. As I said, it's an ongoing dynamic equilibrium.

ATOL: You're participating in the Ubud Writers Festival this year. Are events like that a unifying force, or are they divisive, highlighting that Bali with its Hindu culture is outside the Indonesian mainstream?

GB: When you ask people in Jakarta where they're going on holiday, they say Bali. There's a feeling that's strengthened in recent years that Bali is a national treasure.

It's worth noting the absence of international literary festivals in Yogyakarta, the cultural capital, and Jakarta, the national capital. Ideally, over time, the Ubud festival will show the way for festivals in Yogyakarta and Jakarta. Ubud's [festival] theme this year, Unity in Diversity, the national motto, is a good model to show the way.....

BRIC ambitions for Indonesia
By Sara Schonhardta

JAKARTA - With Indonesia's economic growth among the strongest in Southeast Asia and brightening future prospects for the resource-rich country, economists are weighing whether it should be the next country added to the BRIC grouping of fast-growing emerging economies comprising Brazil, Russia, India and China.

When US investment bank Goldman Sachs came up with the BRIC acronym in 2001, it projected that the combined economic size of the four countries would be bigger than all Group of 7 countries except the United States by 2050, according to Milan Zavadjil, country director at the International Monetary Fund's (IMF) Indonesia office. (The other G-7 countries being Japan, Germany, the United Kingdom, France, Italy and Canada.)

Sticking to that definition, Indonesia is arguably ripe for inclusion
to the club. For some financial analysts, Indonesia's BRIC designation would be symbolic of the gathering global shift in economic power away from the developed G-7 economies and towards faster-growing emerging ones. It would also give a boost to President Susilo Bambang Yudhoyono's economic management credentials.

Indonesia still lacks certain BRIC indicators, including large-scale foreign capital inflows, which until now has allowed the government to maintain a relatively hands-off approach to rising inflationary pressures. If capital inflows were to rise significantly above current levels, Bank Indonesia, the central bank, would be put to an important test, economists say.

There are limits to building up foreign reserves and allowing the exchange rate to appreciate, said Zavadjil, who believes sustained investor interest in Indonesia will depend more on achieving investment grade credit ratings than BRIC admission. In January, Fitch Ratings upgraded Indonesia's sovereign credit rating to BB+, based on improvements in the country's public finances and the economy's resilience to the global crisis. Fitch research estimates that Indonesian banks enjoy some of the strongest lending margins in Asia, and limited competition means that yields should remain strong over the medium term.

The stable rating is still one level below investment grade. Ai Ling Ngiam, the lead analyst covering Indonesia at Fitch in Singapore, said reservations remain about upgrading Indonesia to the coveted A rating, which would signal to investors that Indonesia is capable of meeting its financial commitments even in adverse economic conditions.

"The growth side has been acknowledged," said Ngiam. "But what has been lacking is infrastructure improvements and cooperation from local governments to get projects underway." She says the government often says the right things, but then fails to act.

Indonesia's past crisis responses may justify the need for caution. By not factoring in the risk of rising inflation, the government would have to move quickly if sudden vulnerabilities arise that would call for strong policy adjustments, said Ngiam. She argues that more pre-emptive measures are needed to hedge against fast fluctuating foreign capital flows in and out of the country's illiquid financial markets.

That said, many economists believe that Indonesia is now in an economic sweet spot, with economic growth poised to hit 6% this year after gross domestic product (GDP) rose 6.2% year on year in the second quarter. President Yudhoyono is even more bullish, predicting that economic growth will reach 6.6% by year's end.

The Jakarta Composite Index, Asia's second-best performing stock exchange so far this year after Japan, has reflected the bullishness, hitting a record high on July 29 following the appointment of Darmin Nasution as Bank Indonesia's new head, ending a 14-month impasse over the central bank's leadership and signaling to the market a move towards prudent macro-economic management.

Foreign direct investment (FDI), meanwhile, hit $7.8 billion in the first half of the year, a 49% gain over the same period in 2009. Indonesia's investment coordinating board now predicts FDI could reach $13.1 billion by the end of the year.

Resilient in crisis
When the global economy started to unravel in early 2008, some economists and investors worried that Indonesia would repeat the tailspin that devastated its economy and emptied the national coffers during the 1997-98 Asian financial crisis.

The government responded to that crisis by raising interest rates and tightening fiscal policy, but those interventions failed to stop the rupiah from plunging 85% against the US dollar. The subsequent double-digit inflation triggered steep gains in the prices of key staples such as rice and cooking oil, and sparked the riots that eventually forced then president Suharto to resign.

When the 2008 global recession hit, Indonesia was better prepared. The central bank had built up adequate foreign exchange reserves to cushion against foreign fund outflows and expansionary fiscal policies stoked strong domestic demand. Abundant natural resources, such as palm oil, coal and timber, have also allowed Indonesia to manage the downturn with only a moderate slowdown in economic growth thanks to steady demand from places like China, which is increasingly relying on Indonesia to help meet its growing energy needs.

Investors have since watched Indonesia's recovery with interest. Rapid population growth, a growing middle class, abundant natural resources and low levels of government and household debt give the $690 billion economy - Southeast Asia's largest - an advantage as an investment destination over mature economies such as the United States and Europe, said Zavadjil. "In a not very bright global economic story, Indonesia stands out," he said.

Yet short-term risks remain, namely rising inflation, which has accelerated to 6.98% year on year after an unexpected jump to 6.22% in July. While most of Asia’s major economies have raised interest rates to stem inflationary pressures - India has raised its rate four times since the start of 2010 - Indonesia has taken a different tack, holding its benchmark interest rate at a record-low of 6.5% for the 12th month in a row.

Some economists say Bank Indonesia will need to raise rates to 7% before the end of the year to keep inflation within its targeted 4-6% band and to strengthen its own credibility in international markets. BI governor Nasution says that for now, the government prefers to emphasize economic growth over stability.

Last month, he blamed the up-tick in inflation on unseasonably wet weather that has hurt harvests and forced up the cost of vegetables and spices. That means an increase in interest rates would have little impact on the price of these goods, which Nasution predicts will fall after the Muslim fasting month of Ramadan. The cost of goods typically rises during Ramadan when food consumption increases due to the fast-breaking events and charity that mark the holiday.

In the longer term, analysts say income inequality could prove more problematic since Indonesia still trails far behind the BRICs on per capita investment in major infrastructure and human capital.

"The government has failed to perform the most basic functions to support economic growth," economist Jonathan Pincus wrote in an e-mail to Asia Times Online. "Infrastructure development is slow, particularly in power and transport; the education system is failing to provide people with basic skills and to prepare them to acquire more advanced technological skills; the legal and judicial system are dysfunctional."

Pincus, dean of the Fulbright Economic Teaching Program in Ho Chi Minh City, Vietnam, recently co-authored a report, "From Reformasi to Institutional Transition" that argued Indonesia's economic strategy relies too heavily on natural resource exploitation and is lagging behind competitors in the region in manufacturing exports and employment growth.

"Negative [Suharto era] New Order legacies have left Indonesia with a political and administrative system that creates obstacles to enterprise and innovation," Pincus wrote. He also argued that overcoming entrenched nepotism and corruption will require much deeper reform and investment, and warned that investor sentiment is not a good indicator of the country's long-term growth prospects.

Still Indonesia's relatively cheap labor force and perceived political stability under Yudhoyono is attracting multinational companies that are looking to establish production bases in Southeast Asia. Indonesian authorities expect to lure more foreign funds as manufacturers expand their existing operations to take advantage of the rising purchasing power of Indonesia's growing middle class.

Zavadjil says companies that do not have a presence in Indonesia are taking a look for the first time and some small companies are looking to upgrade their activities. Indeed, corporate giants from Japan, China and South Korea are all making new investments in the country. For instance, Panasonic has started to redesign certain of its products to appeal to the Indonesian market and Nissan has outlined plans to more than quadruple its local sales by 2013.

There is no denying the strong fundamentals offered by Indonesia's market of 240 million people, and economists say the foundations are largely in place for the country to continue down the path to sustained growth regardless of short-term inflationary pressures. But at least for now, those building blocks may not be solid enough to be considered among the BRIC countries.

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