Friday, February 06, 2009

Indonesia and The Election Year

This year, Indonesia will face two election: the general election for legislative body's members --from local councillor in district level, to provincial and state parliaments-- and the presidential election. The first one will takes place next April 9th, whilst the second one on July 5th.

Unlike the previous election in 2004, the general mood this time is a little different. In 2004, everyone anticipated the coming election with excitement. Five years ago, we experienced our first ever direct presidential election. Before, our head of state always picked by a handfull members of the People's Representative Assembly, a sort of Indonesian version of the US Congress.

In 2004, we were also eager to end our political landscape's turmoil. We had a very fragmented coalition back then. At first, after the 1999 election, we had Central Axis Coalition, consists of Golkar and a few Islamic parties as the ruling coalition. That coalition collapse halfway, resulting an impeachment of the then presiden Abdurrahman Wahid. Golkar approached PDIP --the winner of 1999 election-- and together they backed Megawati, as the new president.

Maybe the public back then in 2004, was tired to watch all of those political gimmicks. Not to mention, the trial of Akbar Tandjung, that went nowhere, corruption everywhere, incompetence in all level of government. The election came and seen as a rescue, a way out, to break and end this political fiasco, and create a better one out of it.

Today, the mood is different. We're not that excited to welcome the election year. We want to see progress, we want to see improvement, we want to work, work, work, for the better of our country. We tend to see the election as an obstacle, in one way or another, especially when it got nothing to do --or at least so it seems-- to our big project in reinventing Indonesia, making it prosper and excell. The candidates are all old faces who wants to make a comeback to the center stage, and offer nothing new except in rhetoric. No wonder people are complaining, and wishing all of this will end soon.

When dreaming of BRICI is not enough

Lin Che Wei, Jakarta

If everything goes well, in 2050 Indonesia will be the tenth largest
economy in the world in terms of gross domestic product (GDP). The top
10 largest economies will consist of five of the old G7 economic
powers -- the United States, Japan, United Kingdom, Germany and France
-- while the other five will consist of newly emerging economies,
namely China, India, Brazil, Russia and Indonesia. The emerging five
will be cumulatively bigger than the old five (61 percent compared to
39 percent). This means that the emerging market countries will be
playing a much bigger role than the developed economic powers in 2050.

This forecast is, however, based on certain crucial assumptions
regarding macroeconomic, human resource and political conditions. If,
and only if, these assumptions turn out to be valid will this forecast
be realized. Thus, the road to prosperity will most assuredly not be
just a walk in the park. It is bound to be bumpy and hazardous.

Four out of the five emerging countries that are predicted to break
the G7's domination in 2050 are currently known as the BRIC countries.
"BRIC" is the term popularized by Goldman Sachs economist Jim O'Neill
in 2001 to represent Brazil, Russia, India and China -- the world's
four most prospective economies. The key features of these four are
their large populations, strong economic growth and political
stability. Most portfolio investors have a tendency to lump these
countries together and invest in these countries as one basket.

So, why is Indonesia not in the group, converting it into BRICI?
Indonesia actually has similar characteristics to the rest of these
countries, as shown in the table below.

We have a big enough population and high enough economic growth
compared to the countries making up BRIC, showing that we have the
same potential for growth as they do.

Based on these features, we should be in the group, making it a group
of five instead of four. So, why aren't we?

First, despite our economic recovery, Goldman Sachs believes that the
fulfillment of the conditions necessary for long-term continuous
growth in Indonesia would be an unrealistic assumption. In almost all
variables of the GES (Growth Environment Score) utilized in the model,
Indonesia scores favorably against the BRICs, but falls short in the
political stability necessary to foster long-term growth. Further
variables within the political stability component include "rule of
law" and "corruption", two measures on which Indonesia clearly needs
to improve.

A stable political regime promotes confidence entailing higher
investment and growth. This requires well-defined property rights,
generally well-functioning institutions and little corruption.
Nevertheless, the BRIC countries were determined during Indonesia's
political transition, when a stable Indonesia seemed uncertain.

Ever since, conditions have improved. Our Corruption Perception Index
shows progress has being made, with our score increasing to 2.4 in
2006 from 2.2 in 2005. Not only that, we have also made significant
improvements in terms of the Rule of Law Index. In 1998, our score was
only -0.97, but now in 2006 we have booked a score of -0.34.

With the holding of successful elections and the succession of
President Susilo Bambang Yudhoyono as Indonesia's first directly
elected President, we can only assume the best is yet to come. BRICs
came under the spotlight at a time when the world was still utterly
dismayed by the proliferation of terrorist attacks.

With the Bali bombings, it is natural that the threat of terrorism has
loomed large over the archipelago. Nonetheless, the results of the
antiterrorism measures taken by the government have been quite
positive. Hence, we should also take a positive view as regards the
terrorism issue in Indonesia.

Second, Southeast Asian countries have been excluded from the
grouping. The BRICs proposition was put forward during a time when the
region was recovering from the Asian economic crisis. This made the
region less attractive than the thriving economies of Latin America,
Eastern Europe, South Asia and North Asia, creating skepticism that
the region could host an economic powerhouse. Yet, ever since then,
the region has been proving that it is now back on track for competing
with other developing regions.

Third, compared to the other BRIC countries, Indonesia's capital
market is relatively small. Its market capitalization only comprises
29.5 percent of GDP, while in the BRIC countries, excluding Russia,
market capitalization is over 70 percent of their respective GDPs.
This fact has deterred some potential investors who might have
otherwise come our way.

Last, but not least, Indonesia suffers from a combination of negative
media exposure and lack of self-promotion, creating a negative
perception in the global world that Indonesia is a dangerous, unstable
country rife with insecurities and natural disasters. Needless to say,
the negative exposure has not helped promote the image of stability,
which the country if it wants to attract more investment.

Based on all of the above, why should Indonesia not be included in the
BRIC countries, and why should we worry? The main benefit that we
would reap from being a member of BRICI is increased investment. Since
the initial BRICs report, its impact on investment has been
substantial; more investment has been going to these countries due to
their expected growth potential. If we could attract investment like
that, a trickle down effect that would increase our prosperity is only
to be expected.

Second, with the potential to become the largest economic bloc in the
world, BRICI will have better leverage in global economic
policymaking, which is currently dominated by the G7, not to mention
the political power that comes with such leverage.

Third, Indonesia would also benefit from the ability to benchmark
ourselves against the most prospective countries -- i.e., the BRICs --
so as to attract more investment.

There are many major steps that need to be taken to turn this dream
into a reality. First of all, Indonesia needs to continue improving
its political stability, uphold the rule of law, reduce corruption
levels and display a commitment to long-term economic growth.

Second, we also need to show our commitment as a leader in Southeast
Asia, as the most obvious representative for the region in BRICI.

Third, the perpetual improvement and development of the capital market
is also required to foster more sustained investment.

Fourth, the quality of stock market governance needs to be improved,
as does the stock market's depth and breadth.

Fifth, the government needs to adopt a proactive role in promoting
Indonesia. A marketing campaign, not unlike Malaysia's "Truly Asia"
campaign, could help bridge the gap between global perceptions and
reality. All these endeavors have to be reinforced by a commitment
from the government and investment community.

Whilst wishing to get into the BRICs circle, we should not overlook
our other competitors that have significant chances of entering the
same group. In Southeast Asia, our most prominent competitor will be
Thailand. Yet, Thailand does not have a big enough population. Its
recent coup d'etat has torn apart its previous political stability.
Outside the Southeast Asia region, our potential competitors for BRICs
will be South Korea and Mexico. South Korea in reality has quite a
small population compared to Indonesia and the BRIC members.

However, its economy is one of the best among the Asian and the
emerging countries, making it an established country on its own.
Mexico, on the other hand, has around 110 million people, comparable
enough to the BRICs and us. However, Mexico is now in political
turmoil after its recent presidential election resulted in protracted
demonstrations that almost paralyzed its capital city.

Noting our own key features and our potential competitors, we believe
that Indonesia deserves to be let into BRICs and change the group to
BRICI. When, realistically, could we join the group? In our opinion, a
target of between two and three years would not be overly ambitious.
The writer is the chief executive officer of PT Danareksa Sekuritas.