Thursday, February 16, 2006

Slowdown in Indonesian economy, anti-graft campaign, and the upcoming social unrest

Indonesian currency rupiah gained almost 7% in the last few months. But it can't help people to get jobs, neither to stop companies send more people out of the job market. And further slowdown in the economy combined with higher production cost will surely push industries to cut the easiest, the overhead, and that would lead to an even bigger unemployment and social upheavals.

Even the so-called healthy companies like PT Indofood Sukses Makmur Tbk have to cut thousands of workers. Last year alone the company sent home almost 4,500 workers as the consumer goods company trying to survive from the slowing demand.

Late last month, thousands of workers at PT Dieng Jaya (a mushroom producer) in Wonosobo, Java, went on strike demanding massive lay-offs because the company had failed to pay salary in 19 months.

Wood-based industry might be the worst as companies are increasingly difficult to get raw material. PT Surya Dumai announced late last month that as of February 1st, the company will close down the wood panel production facility and send home 1,000 workers. Wood-based industry in South Kalimantan planned to lay-off 11,800 workers by first half 2006 and could reach 19,000 by the end of the year.

In Aceh, last month shareholders of PT Asean Aceh Fertilizer had decided to liquidate the fertilizer company and that would means 1,400 workers will be unemployed. The state-owned enterprises ministry voted in favor of the liquidation of AAF and supported the crazy buyback programs of Indosat and JICT.

Look at textile industry. In Semarang, Central Java, 5,832 workers in the textile plants had been laid off last year. PT Dan Liris in Sukoharjo, Central Java fired 1,200 workers last year and another 434 workers early last month. Minister of Industry Fahmi Idris fired back at manufacturers for the recent rejection of electricity tariff amid threats of massive lay-offs.

This is just the start of a possible 2 million people kicked out of the job market for the whole year. And then we got the news about Indonesia's Economy Expands 4.9% in Fourth Quarter from Bloomberg.

Indonesia's economic growth slowed to 4.9 percent in the fourth quarter as higher borrowing costs curbed consumer spending.
The expansion in Southeast Asia's largest economy, the slowest in six quarters, followed a revised gain of 5.6 percent in the three months ending September from a year earlier and compared with the median forecast of a 4.2 percent rise in a Bloomberg survey of 13 economists.

``The slowing down of global exports combined with a local fuel price increase last month and the increase in interest rates,'' Choiril Maksum, director of the Central Statistics Bureau, told a briefing in Jakarta today. ``The decline of the rupiah in the third quarter,'' also contributed to slower growth.

Indonesia's central bank raised its key interest rate six times from August to December to a three-year high of 12.75 percent to stem inflation after the government more than doubled fuel prices, and to help the rupiah recover from a four-year low on Aug. 30. Higher borrowing costs have prompted consumers to delay buying products including motorcycles, cars and homes.

``The banking industry has been concentrating their efforts on lending more to consumers for the past year or two, so the rise in interest rates has affected consumer sentiment,'' Tomo Kinoshita, an economist at Nomura Securities Co. in Singapore, said before the announcement. That's been ``bad for purchases of automobiles and housing.''

Indonesia's private consumption rose 4.2 percent in the fourth quarter from a year earlier, less than the 4.4 percent increase of the previous three months. Manufacturing expanded 2.9 percent in the quarter to Dec. 31 after a gain of 5.6 percent in the third quarter.

Government spending surged 30 percent in the final three months of last year after a previous rise of 16.2 percent. Investment grew 1.8 percent in the period, the slowest pace in two years.

To help counter a decline in domestic consumption, Indonesia wants to attract about $10 billion of foreign direct investment this year, about 12 percent more than last year. President Susilo Bambang Yudhoyono said the government will need about $430 billion of overseas investment by 2009 to help the economy expand by an average 6.6 percent.

Well, that's our problem. The real foreign direct investment (FDI) recorded by Central Bank is far below the numbers announced by Investment Coordinating Board (BKPM). Forget about FDI. In the last few days we heard some Indonesian businessmen announced their plan to invest in China (Lippo Group and Sinar Mas) or the latest from Sampoerna who put a bid to buy a London Casino at 115 million poundsterling.

Indcoup said,

Sampoerna made his fortunate by exploiting millions of smokers in Indonesia and now he wants to buy a business overseas! Wouldn’t it be better for him to invest the money in Indonesia (around 2.4 trillion rupiah!) – where many people still live below the poverty line - and create jobs here rather than see such a huge amount of money flow out of the country? Isn’t this the least this dollar billionaire could do?

On top of all of these, local lenders, especially the state-owned banks, are reluctant to disburse loans afraid of prosecutions should the debtors default on payments. And even if they managed to give new loans, companies, especially the state-owned companies are reluctant to invest in new projects as they're afraid of corruption charges. The second article of Law on Anti-Corruption is clearly frightening.
A write-off may be a usual practice in the world of banking and under the Indonesian banking law it's allowed. But under the Article 2 of Anti-Corruption Law any banker could be sentenced to 20 years behind the bars for such write-off as it could be interpreted as easing the debtor's pain, giving the benefit to others (debtors).
The haircut is a normal practice in the banking industry if a debtor failed to service the debts for acceptable reasons. But that could be considered a crime too.
A bad debt of US$ 1 in the state-owned bank is currently translated into a loss to the state of US$1, so that's a corruption and a crime. This is clearly a false interpretation of what is the state money in a state-owned bank and how a bank works. From my point of view, the state money in a state-owned bank is the portion of equity of the bank. While others are depositors money the bank pass-on to debtors as loans. We can't charge bankers in the state-owned banks of corruption simply because the loans turned out to be bad loans. Surprisingly police and prosecutors sometimes buy such argument if you're lucky, politically strong, and couldn't boost the anti-corruption image.
An investment banker described the anti-corruption campaign as something really good but at a price, the slowdown of the economy, and that could means an invitation to another evil, unemployment and social unrest.

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