Ministers are having a hard time building investors’ confidence, and the mood is unlikely to improve without regulatory change, says Suzanne Miller.

When Indonesia’s President Megawati Soekarnoputri kicked off 2003 by declaring it “The Year of Investment”, foreign investors had reason to think their luck was going to change. But as the end of the year draws near, there is still no sign of the long-promised investment law that was supposed to replace the outdated 1967 act – a decree that many hoped would align investor rights with international standards. And there is still no sign that the government has seriously tackled corruption or reformed the courts.

“A lot of us have heard the government say it wants to create commercial courts for whom money is not an issue. But they have not yet moved very far on reforming the court system,” says Wayne Forest, president of American Indonesian Chamber of Commerce in New York.

Unhappy with progress

Even President Megawati admitted that corruption was still a problem, when she visited New York City in September. “Among the many outstanding issues are the problems with corruption and law enforcement. I am personally unhappy with the progress being made so far,” she told a crowd of investors over breakfast at the Grand Hyatt hotel.

Investors share that unhappiness. Melissa Obegi of Oaktree Capital Management, who attended the breakfast, said in an interview: “Indonesia is pretty bad in terms of enforcing investor rights. You notice it a lot because it has such promise. That’s why it is a striking problem.” Investor confidence has been in a dip since the Asian crisis of 1997-1998 and the Bali and Marriott Hotel bombings this year were another big setback. Since the Asian crisis FDI has been negative every year.

President Megawati’s message to investors at the New York breakfast was essentially: be patient, the economy is on the mend. Last year, the economy grew by 3.7%, its best year since the onset of the Asian crisis. The government is targeting a 2003 inflation rate of 6%, down from 60% in 1998 and the budget deficit has been cut from 4.8% of GDP in 2000 to 1.8% in 2003. Official debt has fallen from 100% of GDP in 2000 to less than 70% of GDP this year. The stock exchange has rallied almost 300 points from three years ago and the exchange rate has stabilised.

The government is feeling so confident that it is winding down its IMF programme. During the New York meeting, Indonesia’s minister of state enterprises, Laksamana Sukardi, said the government would issue $500m in sovereign debt to help finance the fiscal deficit, as the country is no longer eligible for debt restructurings under the Paris Club.

Moody’s Investor Service liked what it heard when the delegation paid a visit to the rating agency during its New York visit; it upgraded government debt days later. The sovereign debt issued in foreign currency and rupiah was raised to B2 from B3, still non-investment grade. Citigroup is expected to lead-manage the bond issue.

It is doubtful, though, that the upgrade will improve the mood of foreign investors who want to see tangible reforms. “All investors should have done better than they have,” Ms Obegi chided the Indonesia minister’s discussion panel.

Mr Laksamana responded: “We recognise the problem and copy exactly what the New York Stock Exchange has done with Sarbanes-Oxley. We are putting in more stringent requirements, more independent members of the board.” He also said the government was creating a debt department in the government’s finance office to create a more viable process for privatisation. “We want to privatise openly,” he said.

Investors dissatisfied

Some investors want more immediate assurances, however. “Privatisation is key to the agenda. Yet Mexico’s Cemex was left astray in the middle of the road. What assurances can you give about foreign company rights going forward?” challenged Eugenio Garza of Goldman Sachs.

Mr Garza was referring to the trouble that Mexico’s cement giant, Cemex SA, has had in gaining control of Indonesia’s big cement company Semen Gresik. Two years ago the government promised to sell a majority interest in the company to Cemex, building on the latter’s 25.53% share. Since then Cemex has been caught in a crossfire between the government and a province where part of Semen Gresik operates. Mr Laksamana assured Mr Gaza that the Supreme Court was making progress on the case.

He also said he was committed to privatising and restructuring the country’s other major industries, such as banking, oil and gas, mining and power plants. “It is my job to talk myself out of a job,” he told the assembly with a smile. If that is the benchmark of success, investors can only hope it will be soon.