This is a forethought for investors of Indonesia markets: “Indonesia shall shift into a military or semi-military administration and set free some prominent suspects in the corruption and human right cases including East Timor’s. There would be more positives than negatives. This shift would help Indonesia build image as a secure country and bring stability of social and politic; a material condition to stabilize macro economy and reinforce asset restructuring.”
Equity investors MUST consider this development before investing. Bear market may turn into bullish if this scenario develops. Market could continue to regain its upside momentum and enter a new bullish cycle of the same kind of Karachi market over the next one or two years.
Stable condition following the shift could mitigate skepticism among investors and improve market confidence. Productivity and capacity utilization gains would be sped up and jobless rate would decline.
In whatsoever the reasons the indecent proposal will not satisfy public, but Indonesia somehow has no choice but to recon ciliate. The main opponents of this unpopular proposal would likely be Indonesian reformists; among others are Muslim factions and MPR chairman Prof. Amien Rais. However, the oppositions or anticipated demos are unlikely to materialize leading to social unrests as long as economic growth stays above 3%.
Military stimuli are alternative approaches to prompt confidence and economic growth. Current civil government has recently accommodated some interest of military groups, but it does not have the ammos or willingness to improve confidence, security, and direct fiscal and monetary stimuli. In any event it will come too late for government to act before Indonesians who are particularly concerned by the slow, disappointing progress of the economy become angry and go to the streets for protests, the same kind of protests which occurred in Jakarta in May 1998 or in Argentine in December 2001.
At this juncture, the administration shall continue to ease monetary policies. SBI rate shall be slashed further to near nil real rate (or 0.5% at the most) and maintain at this level until factory capacity starts to near 90% utilized, or approximately within 6 to 9 months. With annual rate of inflation currently at 10.3%, this means central bank shall cut SBI rate by 2-3% immediately. At the same time, the tendency toward higher electricity, energy and telephone tariffs must be stopped to keep consumer prices low. Monetary and fiscal policies must be more active and aggressive, and anticipated well before Indonesia enters into a negative consumption growth period or a deflationary spiral of the same kind of Japan within the next three years.
If indecent proposal goes forward, the alleged cases involving Akbar Tanjung, chairman of Parliament and Golkar Faction, the Attorney General MA Rachman, for alleged corruptions, a number of active and ex-officio army generals for Timor’s human right cases, and the cases against conglomerates Sudono Salim, Sudwikatmono must be selectively written off from the book. For now, the main goal is to achieve political stability, strong government, while the main target to deal with conglomerates is to raise recovery rate of underperforming assets held under IBRA.
Only strong government with military backups can be decisive and effective, and willing to ask conglomerates to return their money, invest and set the economy in motion. For example, it took 19 months to restructure Sinar Mas Group (SMG) and more than a year to do the same job at Astra International, or equivalent to 5 years after crisis. Still, it was complicated to gain two-third approval of SMG creditors, and twice to restructure Astra loans after its 1999 restructuring, while risks of default remain on the table if it fails to restructure in the next 12 months. It would have gone smoother if government were strong and decisive.
The case of Mr. Syahril Sabirin, the central bank governor, who was released from charges in Bank Bali scandal last June is another example. His release directly or indirectly has resulted in more stable and accountable monetary policies. For example, SBI rate cuts have since been sped up. The fact is public now tend to forget about Bank Bali scandal although it once became a major issue and disrupted President Habibie government in 1999.
Pakistani Syndrome – Upbeat Market
In the last decade, Philippines and Indonesia administrations have slowly moved in a similar direction with Pakistan’s. The election of Arroyo and Megawati in some extent has followed to the election of Benazir Bhuto as Pakistan Prime Minister. The three women are also the daughters of previous leaders of the country.
In 1999, President General Musyaraf took over Pakistan civil administration and turned it into a strong, stable military government. He has brought stability and returned market confidence, with Karachi index soared 92% in 2002, ignoring world stock market fluctuations.
In Indonesia, there are indications that military has recently been gaining momentum, taking more control over administration. The return of the Army Chief of Staff position to General Endriartono Sutarto and the re-election of Sutiyoso as Jakarta governor are among examples. In the Philippines, AFX Asia reported early November that Arroyo opponents might run a coup, with possible support from Special Military Forces, Marines and Air Forces, although Philippines government’s spokesman denied and neglected the issue.
This indecent proposal is proposed temporary until general poll in 2004 indicates the results. With government being back by strong military figures, Indonesia could fully back anti terrorism campaigns sponsored by US and its allies. Only strong, effective government can strongly back anti terrorism agenda, brings back security to people and pull back the country out of crisis. It could return market confidence and DOUBLE return on equity (ROE) in 2003.
Regards,
By Djoko Santoso Soenoe
Notes: Original date of writing is 15 November 2002, but uploaded in this website in 18 May 2020 without revisions. Upon completion of writing it was then forwarded to some market players, media and political figures.
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