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COMMENTARY ON US-INDONESIA COMMERCIAL DEVELOPMENTS FROM THE AMERICAN INDONESIAN CHAMBER OF COMMERCE

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Thursday, December 31, 2009

Gus Dur Passes



The great humanist and former President of Indonesia, Abdurrahman Wahid ("Gus Dur"), beloved by his people, has passed away at age 69. The first President after the New Order regime of President Soeharto to be elected by democratic means, Gus Dur, will be remembered for championing the rights of minorities (especially the Chinese), religious tolerance and pluralism and for his unflagging effort to democratize Indonesia and Islam. A thorn in the side of the powerful, Wahid was the one politician whose instincts and abilities equaled those of President Soeharto. Although political opposites, the two played at the same level, utilizing the sophisticated tools of the consummate Javanese leaders they both were.

I had the pleasure to meet Wahid in the early 1980's after he had first become the head of the largest Muslim organization in Indonesia (NU). His house was often filled with the sounds of Western classical music he loved. Always ahead of his time, Wahid was writing then about adapting computers to the pesantran (rural based schools with an Islamic curriculum). He knew then how to effectively challenge the authoritarian Soeharto regime without ending up in jail; his sagacity as much as his popularity made him untouchable.

As President, Wahid ushered in an era not unlike the Prague spring. The euphoria and sense of weightlessness that followed his inauguration lasted until a push back of elites disturbed and threatened by his reforms and tactics forced him out after only 22 months. He went on to continue to fight for his principles but the collective weight of his infirmities (blindness, strokes, diabetes) limited his political effectiveness.

In 2000 AICC hosted him in New York. Hungry upon his arrival from the airport, the worldly Wahid asked for a bagel, "the food of all New Yorkers", he quipped. He disarmed an audience of investors and corporate chairman with his puns. When an executive of General Electric introduced himself, Gus Dur, replied "Nice to meet you, I also know quite a few generals, some of whom are not too happy with me".

Some of his other notable quotes (courtesy of the Jakarta Globe):

  • Suharto was a New Order president. Habibie was In Order and I am No Order.
  • The deep problem is that people use religion wrongly in pursuit of victory and triumph. This sad fact then leads to conflict with people who have different beliefs.
  • You don't realise that losing the presidency for me is nothing ... I regret more the fact that I lost 27 recordings of Beethoven's Ninth Symphony.
  • Democracy is not only not haram (forbidden) in Islam but is a compulsory element of Islam. Upholding democracy is one of the principals of Islam, which is syuro (assembly).
  • There must no longer be anything to differentiate Indonesians based on religion, mother language, culture and ideology.
  • If today there are people calling Islam bad names, we will teach them that Islam is peaceful.
  • Seventy percent of our nation is saltwater, so why do we import salt? It's okay being stupid but why are we purposely being ignorant?
  • This is an ideal team. The president can't see and the vice president can't talk. --After becoming president alongside the famously taciturn Megawati Sukarnoputri
  • I need help to step up, let alone to step down. --On being asked to resign
  • If in the past I said that the House of Representatives was a kindergarten, now I say it is a playgroup.
Beloved by rabbis, priests, ulamas, and people of a generous spirit everywhere, we say farewell to a great man, a man ahead of his time, who moved his country forward into an era of free thinking and intellectual honesty. We express our condolences to his family.

Tuesday, December 22, 2009

2001 Redux ?

In 2001, Indonesia’s President, Abdurrahman Wahid, lost a no confidence vote in the National Assembly (MPR) and he resigned just 18 months into his 5 year term. His Vice President, Megawati Soekarnoputri –whom Wahid had edged out in indirect Presidential elections -- completed his term. Many believe that “dark forces” --allied with former President Soeharto and Megawati’s husband-- opposed to Wahid’s reforms conspired to essentially impeach him.

Are similar forces gathering today -- in the wake of the Bank Century bailout scandal-- to unseat President SBY and his government ?. I don’t think so but judging from the commentaries in Indonesia’s press there are some in Jakarta and elsewhere who aren’t so sure. Before we start moving our money or canceling our business plans lets take stock of what is before us.

Indonesia is a different place now than it was in 2001. Its electoral system has been radically altered: Presidents are now directly elected, and are not as subject to Parliamentary recall as they had been. Her people are much more politically astute, having lived with a free press (a very raucous one I might add) for many years now. Its unlikely that some collection of forces, even those with deep pockets, could buy the support that would be necessary to bring down a government. Internet social networking tools such as Facebook represent new avenues of protest and social action. No matter what the actual legal parameters are, a bailout is a judgement call. Hindsight is always 20-20. Boediono and Sri Mulyani were part of the decision to bailout but not involved with technical details that are open to further questions following a preliminary government audit.

The Bank Century affair is revealing a rift, never a secret, that had developed during SBY’s first term between Sri Mulyani and businessman and former minister, Aburizal Bakrie. Its easy to connect calls for her resignation to him. She was hard on the group after a major mud volcano erupted at one of its drilling sites (Lapindo) and did not allow the temporary suspension of trading of the shares of its flagship enterprise, Bumi Resources. However, you could also argue that there are many opportunists in Parliament whose stock-in-trade is political grandstanding who could just as easily be making noise independent of Bakrie and the political party he heads, Golkar. Besides, given the Bakrie group’s need to raise capital for their expanding mining operations, it would not be in their interest to foment a controversy just to get back at Sri Mulyani. They have plenty of smart people who understand that their costs of funds would rise immediately upon her resignation.

Are there legitimate questions that can be asked about the bailout ? Yes. The public deserves to know more about how funds were handled after the bank was bailed out (similar questions are being asked of banks worldwide), especially if there were illegal transfers. The House inquiry must be transparent. Is there a political challenge to SBY’s coalition ? Yes, but its too soon to say its completely destroyed. Is there deal-making going on between legislators and the executive branch. One would assume so; perhaps Indonesians are looking at the US health bill machinations for inspiration. For many of us, Indonesia is a much noisier place than it was a generation ago and we can live with that, just adjust your noise-cancelling headphones. Meanwhile, the focus must return to the economy and how to clear obstacles to job creation and investment in infrastructure.

Thursday, December 10, 2009

Barry Obama Returns to Indonesia


Although President Obama has yet to visit the country he lived in as a young lad, at least his facsimile has arrived. Indonesian artist Edi Chaniago has created an almost life size bronze of Obama as a ten year old, smiling and gazing at a butterfly. The pedestal contains a quote from Eleanor Roosevelt: "The future belongs to those who believe in the power of their dreams." Hats off to Chairman Ron Mullers and the members of his Friends of Obama Foundation. The statue is in a park in Obama's old Jakarta neighborhood and will inspire future generations of Indonesian children to follow in his footsteps and dream the "undreamable".

Anti Corruption Fever Continues to Burn


Demonstrators were out in force in Jakarta and other cities this week in celebration of UN International Anti-Corruption Day with protesters calling for the resignations of Vice President Boediono and Finance Minister Sri Mulyani. Of course, there is not yet any evidence that they did anything wrong in deciding to bail out Bank Century. Each will need their own version of a strong skin as its getting a bit touchy at the moment. Ibu Sri, rather than turn the other cheek, accused the Golkar Party of revenge for decisions she has made in the past against businesses associated with the party’s chairman, Aburizal Bakrie. Their oil and water relationship was no secret in Jakarta, especially after she refused to stop trading on the Jakarta Stock Exchange when several Bakrie-related entities were losing value. Golkar leaders, supposedly a coalition partner fired back warning the finance minister to “be careful”. You hate to see such sniping among the elite; it seems so misplaced given the greater issues confronting the country. The investigations begun by Indonesia’s House and Anti-Corruption Commissions will be one of the best shows in the coming months. They may actually do Indonesia a world of good if handled impartially and don’t turn into a form of extortion of favors from the President. Or worse yet, a witch hunt of dedicated public servants who actually take their jobs and reform seriously rather than worry about getting the best car at the taxpayer’s expense. How ironic it is that amidst this very strong call for the rule of law police and prosecutors jailed a farmer for stealing bananas after he cleaned up after a traffic accident and arrested a grandmother for pinching three cocoa pods. Its heartening to see that even this received, you guessed it, a protest of its own. (these views do not necessarily represent those of the American Indonesian Chamber of Commerce or its members)

Monday, December 7, 2009

Bank Century Scandal Threatens Government

A few weeks back I wrote a commentary entitled “Indonesia’s Watergate” that discussed a feud between Indonesia’s police and Attorney General’s office on one side, and members of the Anti-Corruption Commission(KPK) on the other, centered on a bribery case. The two KPK Deputy deputy chairman falsely accused of soliciting bribes have now been reinstated by the President. It was the public airing of taped conversations at a Constitutional Court hearing , demonstrating the corrupt relationships that often exits in the country’s judicial system, that sparked my comparison. Although the case isn’t completely closed, it was an important test of the President’s commitment to eradicate corruption that he seems to have passed.

No sooner did SBY get on top of this situation then a second “scandal” emerged involving the November 2008 bailout of Bank Century, a medium-sized private bank. Its actually an ongoing scandal that may prove to be more of a parallel to Watergate since it implicates two of the most important members of the President’s reform team: Vice President Boediono and Finance Minister Sri Mulyani. Even President SBY himself has warned of forces trying to topple his government.

Background
Seeking to avoid a contagion that could have brought down 23 banks and sparked a run on the rupiah during last fall’s worldwide financial meltdown (shades of 1998), Indonesia’s Central Bank Governor Boediono (now VP) and Finance Minister Sri Mulyani decided that the insolvent Bank Century deserved a cash infusion. The initial $68 million mysteriously burgeoned to $706 million. Some of this extra amount is now suspected to have been embezzled by the bank’s leading shareholders (now on the lam) to protect the accounts of depositors who were also important supporters of the President’s reelection bid, as well as several state owned institutions. Bank Century (now called Bank Mutiara) was fraudulently managed, and possibly a front for nefarious purposes. Among other questionable practices a state audit discovered a $17 million account that held the proceeds of a US Agriculture Department grant that would normally be placed in one of the state-owned banks. After almost a year investigations have finally begun to determine how money was siphoned out of the bank even after it was taken over by federal authorities. Indonesia’s deposit insurance program would have covered only a fraction of the total ($119,000 per depositor) but yet certain depositors were able to withdraw their full amounts.

The link between the Bank Century case and the case of the arrested Corruption Commission deputies is a tape recording on which the Chief of Detectives is heard offering to arrange for a big depositor to get his money out of the troubled bank (for a cool million) even after its assets were frozen. Just about everyone in Indonesia now believes that the police have grown tired of the KPK getting in the middle of their “business” and needed to put them in their place by arranging to make them look corrupt. Some of these same elements seem to be exerting their influence through friendly bureaucrats and Parliamentarians as well.

Current Investigations
Already the Supreme Audit Agency has issued a report critical of how Boediono and Sri Mulyani handled the matter and Indonesia’s Parliament has voted to open a formal investigation, a process many suspect will not be conducted impartially. Some of the audit report’s premises are also being called into question since the report’s author is a former Director General for Taxation axed by Sri Mulyani in 2006. Basically, its a stormy mess.

There are numerous interest groups that would love to see Boediono, and especially Sri Mulyani fall: politicians, bureaucrats, companies, and individuals who benefit from rent-seeking networks. Many sources in Jakarta report that under the guise of a transparent Parliamentary investigation there is intense pressure on the President to have at least Mulyani removed. Rumors of all kinds of deals being offered to back off are circulating. The President must call their bluff and cede nothing. At the moment she has not backed down either. Two years ago, he declined to accept Sri Mulyani’s offer to resign when she would not de-list Bumi Resources, the influential company tied to Aburizal Bakrie, a senior minister. Hopefully SBY will maintain his support.

Boediono and Sri Mulyani deny any wrong doing and each welcomes a full investigation. Their explanation hinges on procedures whereby once a bank is determined to be in need of funds a separate agency (Deposit Insurance Agency) handles the details. The focus of the investigation needs to be at this level rather than the ministers. It is correct for investigators to determine if Boediono and Sri Mulyani they knew more about what was going at Bank Century after the initial bailout decision was rendered than they have said publicly. Suggesting that they were also fronting for the economic interests of friends of the President without evidence is highly suspicious. The bailout was a reasonable reaction to an unfolding financial calamity that now appears to have been partly responsible for Indonesia weathering the crisis better than many countries. But, as highly educated technocrats neither minister has a political constituency, and they are dependent on the President’s confidence for cover.

Implications
The real question is if they were not directly involved with all the decisions, is there enough of a whiff of impropriety to take them down. If so, those openly pushing for their resignation --who at the moment seem to be highly motivated to prevent systemic changes in how Indonesia operates-- may be able to achieve their goals. The cost to Indonesia’s overwhelming need for institutional reform as well as infrastructure-directed foreign investment could be very high indeed.

(these views do not necessarily reflect those of the American Indonesian Chamber of Commerce or its members)

Tuesday, December 1, 2009

Indonesia's Credit Rating: BB- With Positive Outlook


S & P’s sovereign debt analysts gather in NY from all over the world and its chairman, John Chambers(right), presides. But --as is customary-- even he casts only one vote.   The analysts arrayed in front of him --each an expert on a country-- bring their comparative tools to the discussion.  Ratings are still done the “old fashioned way” in a group format. S & P recently changed Indonesia’s BB- rating from stable to positive.   It wasn’t technically an upgrade, but its a welcome validation nonetheless.

John Chambers told AICC’s November 24 meeting (hosted by Duane Morris LLP with support from Bank Indonesia) that Indonesia was trending positive and ratings could further improve if Indonesia eliminated or reduced energy subsidies. S & P is heartened by the continuing consolidation of democracy in Indonesia and the strong macroeconomic management.  The same “old” weaknesses --although improved somewhat-- remain: infrastructure, legal system, corruption, debt burden.

The recent change to a BB- rating with a positive outlook reflects Standard & Poor's “expectation that a stronger political environment will give rise to a more effective policy setting to address structural problems, while debt reduction and underlying fiscal prudence will remain key elements of macroeconomic policy.” The report goes on to make the following excellent observation about the this year’s Presidential election:
“It also means that the traditional model of a closely intertwined political class and special interests may be more and more challenged in the future, as the electorate becomes increasingly confident and proficient in connecting its election choices to tangible outcomes”

Indonesia’s solid macro- economic management allowed Indonesia “to navigate the crisis without detriment to its fiscal and external credit metrics” leading to further improvements to public debt ratios.  S & P recommends policies be pursued that lead to reserve accumulation and reduction of fuel/energy subsidies (whose prices continue to hold upward price risks). Global demand for commodities and raw materials, which form the bulk of Indonesia’s exports, recovered faster than for high-value-added manufactured goods.

his key paragraph from S & P’s November 11 report is an excellent summary of the ongoing challenges that Indonesia’s is addressing.
“In addition, and notwithstanding the reforms over the past five years, numerous microeconomic distortions prevail, which ultimately detract from the sovereign's creditworthiness. Competitiveness is hampered by infrastructure  shortfalls, legal uncertainties, corruption, and labor market rigidities. A key challenge for the authorities is to maintain momentum and public support for reforms after this year's elections.”

I highly recommend reading S & P's recent full Indonesia Report available by clicking here

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President of the American Indonesian Chamber of Commerce, a private not for profit membership organization based in NY.

These views do not necessarily represent those of the American Indonesian Chamber of Commerce or its members.

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