Investments from Mideast

The Jakarta Post ,  Jakarta   |  Wed, 09/27/2006 9:27 AM  |  Opinion

An investment mission currently in the Middle East to follow up an earlier visit by President Susilo Bambang Yudhoyono could be a good start to a concerted campaign to attract investments from the region.

The mission, which attended a Middle Eastern Investor Forum for Indonesia in Jeddah last week and is shortly to visit Qatar and Kuwait, is attempting to tap into the investment preferences of oil exporters, who want to diversify their portfolios away from U.S. assets.

Among the agreements concluded last week were: a memorandum of understanding between state-owned Gas Company PGN with the Islamic Development Bank for the extension of US$65 million loan for financing PGN projects, and an agreement between state-owned PT Krakatau Steel and the Saudi Al Tuwarqi company to develop a steel mill in coal-rich South Kalimantan.

The Global Meeting of the Emerging Markets Forum in Jakarta last week discussed how oil exporters in the Middle East, which with the high oil prices have been accumulating huge sums of petrodollars, seem less interested in putting their money in U.S. assets.

These major oil exporters still invest the bulk of their profits in dollar assets, especially in offshore dollar bank deposits, but they are becoming more cautious about doing so, worried that a large portion of these funds will eventually be recycled by the banks through aggressive lending. This risks setting off another international debt crisis like the one which occurred during the early 1980s in Latin America.

These rich oil exporters are now seeking alternative investment vehicles, and Indonesia could be a favorite destination for this new investment if the conditions are right and the legal and market infrastructure is conducive to Islamic financial instruments.

As the overall economy becomes more stable and reforms progress on the right track -- although in a sometimes haphazard manner -- it is now high time for the government to put the country on the Arab world's investment map.

This mission could be the first major step. However, the government should design an investor-targeting strategy which, instead of trying to attract investment in general, focuses on promotional efforts to woo a defined set of capital flows from the Middle East.

This kind of strategy would be effective in the Arab world, with its special rules on Islamic finance and investment products under the principles of Islamic commercial jurisprudence, or sharia, which include the prohibition of interest, the sharing of risks to protect returns and avoiding supporting products and activities prohibited by Islam.

The steady rise in oil surpluses in the region and the need for new investment vehicles could increase the demand for Islamic securities and investment products such as non-tradable profit-sharing investment accounts or tradable equity securities and mutual funds. Analysts at the Emerging Markets Forum estimated there are now almost 250 Islamic mutual funds operating with about $300 billion in assets.

The most suitable instrument for Indonesia, which needs large investment for infrastructure development, could be fixed-income securities, known as sukuks or Islamic bonds.

These bonds are trust or participation certificates that grant investors a share of an asset along with the cash flows and risks commensurate with such ownership. Sukuks thus represent certificates of equal value, representing undivided shares in ownership of tangible assets.

The issuance of sukuks therefore involves the establishment of a special purpose vehicle company to own, service and operate specified assets. This instrument can become a suitable vehicle for the efficient recycling of petrodollars because the securities guarantee a steady stream of revenues for the investors over a long period of time.

Malaysia promoted this instrument years ago and has become a leading issuer of Islamic bonds. The global issue of Islamic bonds for financing infrastructure projects in the first half of this year alone totaled $12 billion, almost five times the $2.6 billion in the same period in 2005. The Islamic Development Bank has also begun securing Islamic contracts, notably leases.

However, the country must do its homework if it wants to establish the legal and market frameworks to tap these investments.

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