'Tebar pesona' and rating

The Jakarta Post ,  Jakarta   |  Thu, 02/01/2007 4:30 PM  |  Opinion

Less than a week after Indonesia decided to disband the World Bank-led group of creditors known as the Consultative Group on Indonesia (CGI), international agency Fitch Rating raised Indonesia's debt outlook from stable to positive. In explaining their decision, Fitch Rating cited improvements in the public finances, and government efforts to address investor concerns about corruption and excessive bureaucracy.

The ratings improvement should calm a market already jittery over the government's decision to disband the CGI. The higher rating sends the positive signal that despite the CGI's demise, the government will not face any trouble raising funds to plug future budget deficits.

In fact, the disbandment of the CGI may serve a political purpose beyond mere economic necessity. With or without the CGI, Indonesia will still rely on foreign finance to fund some of its development needs. It is true that the government has started issuing local bonds, but raising too much money from the domestic market would eventually crowd out private investment.

No matter what happens to the CGI, foreign money will always be a source of government funds. The only difference, now that it is gone, is that the government will no longer use the CGI as a forum for seeking loans, but rather can seek loans directly from individual creditors based upon bilateral negotiations.

Alternatively, the government can go its own way in tapping into the international market by issuing bonds. In this case, Indonesia's improved credit rating will likely result in lower financing costs, and this will, in turn, have a positive impact on the public purse.

The rating improvement, as well as better public finances, could have a direct effect on improving the flow of portfolio investment -- or, more precisely, hot money -- which can just as easily flee the country once the market turns bearish. However, this will have no direct influence on the real economy, especially when it comes to dealing with Indonesia's chronic problems of poverty and unemployment.

A larger and more determined effort is needed to address these problems in the real sector. But there is no magic formula available to the government. Only through investment in the real sector can jobs be created and poverty alleviated.

Unfortunately, Indonesia scores badly when it comes to the real-sector economy, especially as regards investment. Data from the Investment Coordinating Board shows that the realization of investment projects plunged by 32 percent last year. Realization of foreign direct investment dropped to nearly US$6 billion last year from nearly $9 billion in 2005. Similarly, realization of domestic investment plans plunged to Rp 20.8 trillion (US$2.3 billion) from Rp 30.7 trillion in the same period of 2005.

The chairman of the Investment Coordinating Board, Muhammad Lutfi, blamed the low project-realization level last year on the low level of investment approvals in 2004, when the country held both legislative and presidential elections. Lutfi says it takes two to three years to carry out investment plan.

Lutfi, himself a businessman, may be right, and the official data seems to support his argument. However, blaming the low realization of investment last year on low investment approvals in 2004 sounds like looking for an excuse when things do not go right. The fact that the realization of investment plans dropped last year should send a warning to the authorities that Indonesia still does not have a sufficiently conducive investment climate.

We have already talked about the problems causing this uncertain investment climate, such as labor concerns, bureaucratic obstacles -- including the overlapping of powers between the central and local governments -- and, most importantly, the failure to properly enforce the regulations.

We are of the opinion that the government already understands enough about the causes, and that it actually knows what to do to address the problems. But, understanding the situation alone is not enough.

In this case, with a heavy heart, we have to agree with former president Megawati Soekarnoputri's criticism of our current President, Susilo Bambang Yudhoyono -- too much grandstanding. The President's tebar pesona (grandstanding) gimmicks may have impressed the market and Fitch Rating, but not real-sector investors. The government will need more than just tebar pesona to impress real-sector investors and attract them to Indonesia so that they can create jobs.

Copyright © 2008 The Jakarta Post - PT Bina Media Tenggara. All Rights Reserved.