Indonesia to keep shining

By Robert M Cutler/Asia Times /August 27,2010.
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.

Dr Robert M Cutler (http://www.robertcutler.org), educated at the Massachusetts Institute of Technology and The University of Michigan, has researched and taught at universities in the United States, Canada, France, Switzerland, and Russia. Now senior research fellow in the Institute of European, Russian and Eurasian Studies, Carleton University, Canada, he also consults privately in a variety of fields.

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Time for China to spend more

by Makmur Keliat, Jakarta | Sun, 08/22/2010 12:29 PM | Opinion The Jakarta Post

In some way, diplomacy could be analogous to someone who wants to travel from one place to another. In order to reach their destination at the right time and to make the journey comfortable, it is necessary to have a road map. This metaphor may be useful to get a broader picture of the diplomatic road that has been built by China in its relationship with Indonesia and ASEAN.

The first attempt to build a road from Beijing to Jakarta was made on April 13, 1950. But it was closed on Oct. 30, 1967 when the New Order regime decided not to continue its diplomatic relations with Beijing. That decision resulted in substantial change in the Sino-Indonesian relationship.

The two countries did not have official diplomatic relations for almost 23 years. The diplomatic road between Beijing and Jakarta was only rebuilt on Aug. 8, 1990. The Indonesian business community at that time had made strong efforts to encourage the Indonesian government to be closer to China. The interruption has shown us that the diplomatic road built by Beijing to reach Jakarta was not made overnight.
Three interesting developments can be identified now the diplomatic road between Beijing and Jakarta has entered the second phase, more than two decades on.
First, China has effectively utilized the road between Beijing and Jakarta to establish a number of intersections through which the country has become well connected and has wider access to other countries and diplomatic forums in Southeast Asia. China has been engaged in the ASEAN+1 and ASEAN+3 mechanisms and is also a member of the East Asia Summit.
It seems the diplomatic road to Jakarta has become an entry point for China to proliferate its diplomatic network and channels to the Southeast Asian region.
Second, China has succeeded in utilizing the Beijing to Jakarta diplomatic road to change attitudes with regard to the communist ideological threat of the 1960s era. Most people in Indonesia no longer see China as a poor country and the bastion of the communist ideological camp, despite the fact that China politically is still ruled by a communist regime. Thanks to media reports, China currently is seen more as a country with the largest reserve of foreign exchange in the world.
Third, China has primarily utilized the entire diplomatic intersection to cope with its large need for energy and natural resources and to speed up regional measures for trade and investment liberalization with ASEAN.
Let us take an example from the case of the ASEAN+1 mechanism. Under the umbrella of the ASEAN+1 mechanism, China in the year 1992 succeeded in persuading ASEAN to agree with the Framework Agreement on Comprehensive Economic Cooperation between ASEAN and the People’s Republic of China.

In fact, the idea of a ASEAN-China Free Trade Area (ACFTA) cannot be separated from, and is an integral part of, policy packages of the Framework Agreement. It is worth mentioning that the first stage of the ACFTA has been introduced without getting widespread public notice in Indonesia.
This can also be considered a diplomatic achievement of China. Formulated as an early harvest program, the target of the first stage has been the reduction of tariff rates for agricultural products to zero percent by the year 2006. That is why, since 2004, Indonesia has received a flood of various agricultural products from China.
In this regard, it would be too much to expect that Indonesia would be able to renegotiate the implementation the ACFTA. China is fully aware that Indonesia is in great need of funding resources from outside for the development of infrastructure.
By utilizing numerous diplomatic intersections it has built with the region, it is more likely that China will do its best to convince Jakarta that the more open the diplomatic road between Jakarta and Beijing, the larger the opportunity for Indonesia to get funding resources from China for building power plants, bridges and roads.
A more realistic option for Indonesia would be to persuade China to accelerate noneconomic cooperation, with the objective that it could be carried out as fast as implementation in the economic field.
The starting point to realize the option is through taking measures to concretize the general points of agreement embodied in the document of strategic partnership signed in 2005.
It is interesting to note the document has not been fully implemented, particularly items related to cooperation in the noneconomic field. China seems to have built a road for economic cooperation with Indonesia like building a highway, but cooperation in a number of other fields such as culture, education and defense seems to have appeared merely as a road map without any real journey being undertaken.
Therefore, the most challenging task that lies ahead in the Sino-Indonesian relationship in the years to come will be how to transform the document of strategic partnership into reality.
Jakarta should do its utmost to convince Beijing that if the focus of cooperation is directed solely on economic aspects, there will be little possibility for China to enlarge its constituency in Indonesia, which could be expected to lend support to the enhancement of Sino-Indonesian relations.
The constituency so far has mainly come from, and been limited to, the business community in this country. China should not repeat the bitter experience of Japan, which was regarded in Indonesia as an economic animal in the early 1970s.
In this regard, enlarging the scope for philanthropic activities, for instance through giving more scholarships to the academic community, might be useful to broaden the constituency. However, this is only possible if China accepts the idea that it is time for the country to spend more and earn less in its bilateral relationship with Indonesia.
The writer is chairperson of the Postgraduate Program, Department of International Relations, School of Social and Political Sciences, the University of Indonesia.

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