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Editorial: Opportunities in crisis
Thu, 10/09/2008 10:37 AM | Opinion
Hundreds of billions of dollars have been taken out of the U.S. commercial papers over the past three weeks, starting right after Lehman Brothers filed for bankruptcy, sparking a flight to the safest possible investment.
But the financial panic and collapse of foreign trust in the American financial system has so adversely affected foreign investors' risk appetite that even what were previously classified as the safest investment instruments, such as short-term U.S. Treasury debts, also came under doubt.
Certainly, the global credit crunch means there will be less money coming into emerging markets, including Indonesia, as foreign companies willing to consider such investments overseas are also likely to be far more risk averse than before.
However, the U.S. financial crisis and its contagion to Europe and the rest of the world could also create new opportunities for Indonesia in terms of foreign direct investment (FDI) in natural resources and the development of basic infrastructure.
The shift of large amounts of capital to developing countries, notably major oil exporters such as Saudi Arabia, Kuwait and the Arab Emirates, over the past two decades has accumulated hundreds of billions of dollars in their foreign reserves.
As the U.S. financial crisis has now spread to Europe, these oil-rich countries are reviewing their holdings or investment vehicles, looking for more diversified investments overseas (outside the United States and Europe), especially in view of the weaker dollar and the steadily falling returns in dollar assets.
Recent newspaper reports estimated the three above mentioned countries alone had built up almost US$1,500 billion in sovereign funds.
Given the unfavorable political developments in Thailand and Malaysia over the past few months, Indonesia, with its largely Muslim population, could become one of their favorite places for FDI if the conditions are right and the legal and market infrastructure is conducive for Islamic financial instruments.
Our basic infrastructure and natural resource development projects could now become much more attractive for sovereign funds from the Middle East to be used as major sources of long-term, stable revenues.
The government has improved the legal framework with the recent enactment of laws on sharia banking and sukuk (Islamic) bonds. The long-term nature of Islamic bonds could make them the most suitable investment instrument for Indonesia because of the country's need for huge funds for infrastructure development, as these bonds grant an investor a share in an asset along with the cash flows and risks commensurate with such ownership.
The government has also stepped up investment promotion in the Middle East under a special mission headed by former foreign minister Alwi Shihab. The investor-targeting strategy that Shihab conducted in the Arab countries could prove more effective in wooing investment because, instead of trying to attract investment in general, he focused promotional efforts on wooing a defined set of capital flows from that region with its special sharia rules in financial services.
This kind of investor-targeting strategy allows the government to choose the FDI it desires and direct that investment to support its objectives related to employment and other development goals.
But the government is well advised to realize that when it comes to FDI and the prerequisites for a conducive investment climate, Arab investors and those from other emerging markets are not much different from those in the developed world.
In this context, the government still has a lot of homework to do in improving the regulatory framework. Good, sensible regulations with high compliance help the market to function properly and the economy to grow. But excessive, low-quality regulations, different interpretations of regulations and regulatory uncertainties hinder investment.
Unfortunately, the bad regulatory environment remains one of the main barriers to new investment in Indonesia, the main source of economic inefficiency and the main reason why the costs of logistical arrangements and starting up a business here are among the highest in Asia.
Low logistics capability -- slow customs clearance, inadequate port and road infrastructure -- makes Indonesia even less attractive to do business in because most investors now demand efficient supply-chain management to enable them to tap the local comparative advantages and economies of scale.
The financial crisis that has gripped the globe and the consequent recession in the United States -- the world's economic powerhouse -- and weakening economic growth in the rest of the world should now serve as a strong warning to the government to accelerate its investment reform measures.
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Dirk Mertens (not verified) — Thu, 10/09/2008 - 7:32pm
I largely agree with what Arif writes, and I applaud him for making such a positive investment in Indonesia. It also counters the stupid and erroneous Western stereotype that Arabs are mainly investing in fanaticism in Indonesia. I hope more people – domestic and foreign – will follow the example and put their money and effort in the ‘real’ economy. Of course they must get the chance to do that. And a little bit of encouragement instead of hurdles would be nice too.
Of course Indonesia could do a (much) better job in creating efficient regulations & administrations, improving education, upgrading the infrastructure, increasing the ability to compete, self-promotion etc. The Indonesian (common) people are diligent and talented enough but their interest may not always coincide with the short-term interest of a small elite. And there is also a cultural issue. We often experience that many Indonesians (especially in the public sector but also in the private sector) are reluctant to use advanced efficiency-increasing information-age technologies for practical business and governmental purposes. This too puts Indonesia in an unnecessary disadvantaged position.
On the other hand, if Indonesians were forced to change this cultural aspect, would it then not lead to more stress? And would this not damage the ‘friendly’ reputation of Indonesians?
ARIF HAMZA (not verified) — Thu, 10/09/2008 - 1:27pm
I am a United Arab Emirates entrepreneur who recently registered a company in Indonesia. I have been to Indonesia a couple of times since 2005. Unlike Malaysia, Indonesia is not marketed abroad as a country, even though it is much richer in its culture and natural resources than Malaysia. The best part of Indonesia is its people who are exceptionally imaginative and can craft anything from everything.
Indonesia fails to attract investments from Arabian Gulf region due to a couple of reasons. To many Arabs, Indonesia is a poverty ridden country which exports housemaids to the region. As a person who traveled widely among many regions of Indonesia and rest of the world, I consider it as a prejudgment. The difference between rich and poor are visible in any part of the world.
I would like to compare India and Indonesia as they are much closer in many of the quoted indicators in your editorial. Further, Indonesian society still respect many of the class concepts of Indian culture through Javanese cosmic roots. In terms of poverty, corruption and social conflicts Indonesia is much better than India. But Indian media was successful in creating a booming economic status to the country, which attracted major foreign investments.
Indonesian intelligentsia has failed to promote a national confidence among Indonesians. So far, Indonesian volcanoes did n
t made a death toll more than Iraq war! Indonesian polity should respect to learn the creativity and imagination of its people.
I strongly believe that Indonesian tax system should be streamlined. More steps means more bureaucratic intervention and more scope for corruption. Currently the Indonesian entrepreneurs has to pay a physical tax whenever they fly abroad. It results in heavy burden in promoting their business concepts.
Indonesian life style has to be more business oriented. Unlimited holidays are not good for a thriving economy. Lack of English knowledge results in less communication to the wider part of the world.
To my knowledge, the emirates of Abu Dhabi is alone have a sovereign wealth fund of US$1,300 billion. Abu Dhabi is the capital of United Arab Emirates which include 7 emirates. So far, I haven't seen any concrete efforts to promote Indonesian business in this country. Most of the trade delegates are interested in city tours and photo sessions than marketing.
I agree on the editorial findings on lack of efficient supply chain in Indonesia. To my experience, shipments from Indonesia takes 3 times than China. Our major shipment port is Dubai and we prefer imports from China than Indonesia due to time factor. We know that many of these items are sourced by Chinese from Indonesia. But as you know, to us "Time is money".
I have respect and trust in the leadership of President Susilo Bambang Yudhoyono and his team members like Mulyani Indrawati who can make a change. Definitely Indonesians deserves a much better space in this world than any nation on this planet.