Indonesia: Not So Good, But Not So Bad!

During my recent visit to Jakarta, local business leaders mentioned Pierre Rochette as one of the few Westerners who understood Indonesia “from the inside.” This led me to request this interview. François Sicart

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Pierre Rochette is currently Director of ICAP (International Consulting Asia Pacific) in Singapore. His first Asian posting dates back to 35 years ago, when he taught mathematics in Laos. Since then, he has spent a good part of his life in Asia, in such countries as India, Malaysia, Singapore, and Indonesia. Pierre is a practical businessman who has gained his experience by exercising high-level but hands-on responsibilities within Schlumberger Ltd., the well-known multinational company. He is also Chairman of the MCE/AMA (American Management Association) seminar on "International Alliances and Joint Ventures," in Brussels.

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Tocqueville: Pierre, since you have recently returned from Jakarta, we would like to know how it feels “on the ground,” so to speak.

Rochette: First, I would ask your readers to set their clock back 24 months. Just remember, you are in May 1998! Pictures of the Jakarta riots are all over the TV news and the front page of your newspaper. Headlines are equally dramatic, with titles such as “Indonesia Is Burning” alluding to both the recent forest fires and the smoke hovering over Jakarta’s riots. While Jakarta residents count their victims, the situation looks extremely bleak with no rosy scenario on how to untangle Suharto’s authoritarian regime.

Today, Indonesia has a government democratically elected by the masses, which only two years ago was totally unthinkable for most political analysts! We should applaud: this transition has been achieved faster and more smoothly than anyone thought possible. With the notable exception of East Timor, no drastic bloodshed has accompanied these profound changes. Globally, one can only praise the Indonesian people for this achievement, for all have shared in this extraordinary restraint: the political leaders, the military leaders and even the students.

To describe for you the mood of the Indonesian people I recently met, let me make an analogy with a family on the path of a hurricane. A devastating hurricane has been announced, making you and your family extremely worried. Your house is fragile, it is not airtight, termites have made their way into your wooden beams etc… Yet, on the following day, surprise! Your home is intact, and the hurricane has only destroyed a few remote houses. What is your mood on that day? You breath profoundly, you enjoy the calm, you clean the house, optimism is back!

Following the election of Abdurrahman Wahid as President with Megawati as Vice-President, many Indonesians experienced that same fresh optimism. Even though this was tainted of complacency at many levels, optimism had returned.

Tocqueville: But for how long?

Rochette: Until… the next hurricane is announced, reminding your family that termites are still at work, weakening your home! Lately, more and more flags have been waved, warning Indonesians that another hurricane could be developing. Those flags come from various directions: the IMF’s impatience at the speed of changes, foreign investors shunning the Rupiah, and the newfound freedom of an unchained press media.

I personally hope these warning flags will be enough to force Indonesians and their government to address and tackle their fundamental issues. But there is an old Javanese saying: “The fisherman wants to get the fish out the pond without creating any ripple on the water surface.” By culture and tradition, the Javanese tend to “patch-up” deficiencies rather than attack the root of their problems. With this approach, don’t be surprised that, so far, not a single “big fish” has been caught.

Tocqueville: What do you mean by catching big fish?

I really mean the main beneficiaries of the Suharto years, who enriched themselves thanks to their intimacy with the system commonly called KKN -- Korupsi, Kolusi, Nepotism, meaning Corruption, Collusion, Nepotism. Daily, the local media talk about sensitive cases involving old-regime cronies, but so far nobody has been indicted. A former deputy attorney general, Sujata, said “Indonesia may be the most corrupt nation in the world, but it is also where the fewest people are tried for corruption.”

Cleaning out corruption is no easy task in a country where the “middle-man” concept dates back to the colonization days. Without doubt, pressure for action is mounting on the government and its judiciary, as most Indonesians are now aware that termites are still there weakening the strong beams that used to support the previous regime. The greatest challenge lies in dealing with the Suharto family itself, but no big fish has been sentenced among the military either.

Tocqueville: The corrupt judicial system continues to scare off foreign investors. Is there light at the end of the tunnel?

Rochette: Under the old system, Indonesian judges were directly answerable to Suharto’s regime, with all the forms of pressure this implies. Today, most foreign diplomats in Jakarta express satisfaction at President Wahid’s new guidelines and strategies. In other words, the direction is good; unfortunately, the implementation is much weaker. Changes are being introduced, new people are put in place, but the process will necessarily take time. And by time, I do not mean weeks but years. So, there is light at the end of the tunnel but the tunnel is probably longer than most Jakarta people would like to believe.

Very much linked to the efficiency of the judicial system is the ability of the government to implement its new bankruptcy laws and to dispose of the billions of dollars of assets held by the Indonesian Bank Restructuring Agency (IBRA). So far, results are not too encouraging. For one success story well documented by analysts (the divestiture of Astra) there have been several disappointing decisions, with critics even raising the spectre of a return of nepotism.

Although Astra was the most valuable company in IBRA’s portfolio it only represented 2% of its assets. There is still another 98% to go, which means about US$, 100 billion -- although the valuation of some assets is seriously challenged (Gajah Tunggal’s shrimp farms, for example)!

I am not sure that enough Indonesians realize the importance of these issues. Skeletons cannot be kept in cupboards forever – especially since cleaning up the debt and locating the whereabouts of associated assets are essential to restoring foreign investors confidence. Here again, however, time is needed.

Tocqueville: How do you gauge investors’ confidence?

Rochette: To grasp the big picture, all you have to do is to look at two indicators: the Rupiah exchange rate and the Jakarta stock market. Both indicators give you the same message: confidence has not returned, and is even still deteriorating.

The Indonesian Central Bank reckons the Rupiah/Dollar exchange rate should theoretically be around 6,400. Although foreign analysts do not challenge this view, the reality is quite different, with a current Rupiah rate wavering around 8,400/$. As for the stock market, it has dropped by around 35% since the beginning of the year. So, lack of confidence is obvious!

In the first months of Wahid’s government, while Jakarta’s mood was still optimistic, both the IMF and investors had already started to voice their prudence. Lately, more and more Indonesians are asking: Does the Wahid government have the skill to implement changes? Can he act forcefully, as Putin might in Russia? My answer is no, because Wahid’s background is totally different. Also, the last election polls only gave him one third of the votes and that lack of majority imposes many compromises.

In addition, it is becoming increasingly apparent that government ministers do not act well as a team, tied up as they are by their allegiance to different political parties. With time passing and personal political agendas taking their toll, this already fragile team spirit may further deteriorate in the future.

Tocqueville: How do you evaluate the current economic picture?

Rochette: Any Jakarta taxi driver will tell you that traffic congestion has eased up. To me, less traffic means that, at a time when Asian economies are recovering quite well from the 1997 financial crisis, Indonesia is not doing as well!

But let’s face it: Indonesians have not elected Wahid for his economic skills. He was chosen more for his political skills and as guarantor against disorder. Quite logically, the President has given lower priority to economic issues, stressing political compromise and ending up with a non-cohesive economic team as a result. His recent minister reshuffling has yet to be fully understood and has still to prove its effectiveness.

Tocqueville: Any light at the end of the economic tunnel?

Rochette: No significant up-swing is in sight! Even the government has revised downward its growth forecast for the year 2000 to less than two percent. Let me explain this mediocre projection in very simple terms:

·The Indonesian economy needs capital to grow.

·Where can it come from?

·Not from the Indonesian government, which inherited a very badly indebted situation from its predecessors.

·So, funding to trigger growth has to come from abroad!

Tocqueville: This sounds inextricably circular!

Rochette: Not necessarily. Indonesia’s ethnic-Chinese still have considerable capital parked in Singapore and other foreign locations – on stand-by, so to speak. With their ancestral ties in Indonesia and their deep knowledge of the business network, they can quickly recognize and evaluate new investment opportunities. So, they will likely be at the forefront of returning investors. In their case, however, all they are waiting to see is a friendlier social climate, as past and recent events in Ambon, Aceh, Lombok and Jakarta’s Chinatown have taught them to be prudent. As of now, these ethnic-Chinese have physically returned to Indonesia, because street security is again adequate, but this does not mean that they are ready to invest in physical assets just yet.

So, while industrial multinationals are waiting for the legacy of past mistakes to be cleaned up, which will take time, the ethnic-Chinese will probably start investing well before all economic and financial problems have been solved. Until then, however, with no significant inflow from abroad, the economic recovery will be slow.

Tocqueville: How will these factors affect the property market?

Rochette: So far, most “big fishes” have not yet been squeezed into bankruptcy proceedings involving assets liquidation. This still has to happen and when it does, one can predict that property prices (at least commercial ones) will drop in the dominant business area, i.e. Jakarta and its surroundings (called Jabotebek).

Tocqueville: How, then, can you sum up the overall situation?

Rochette: At the beginning of this interview, I asked you to go back two years to May 1998. Let’s now go back a further two years, to May 1996! The media praise Indonesia as the ‘Good Boy” of the IMF and the World Bank. The country’s Berkeley-educated economists are complimented. Most economic indicators are good or very good. The long-term forecast looks encouraging as well, based upon the country’s wealth and resources -- very rich underground resources such as minerals & oil & gas, a rich agriculture under diverse climates, a young labour force, cheap labour, the world’s fourth-largest population, and the country’s attraction as a touristic destination.

Have any of those assets been destroyed or taken away? Absolutely not! These resources are still there ready to be exploited, and the country’s long term potential remains intact. Every month passing by distances Indonesia from the Suharto years. Slowly, an Indonesian form of democracy (distinct from a Western one) is taking hold. Ultimately, this should serve as a solid base for more durable and better-distributed economic growth.

Without doubt, the short term will remain erratic. Remember the Philippines after Marcos’ fall! The presidential term of Cory Aquino was chaotic with people like Gringo Honasan playing trouble-shooter. Indonesia today certainly has a few disenchanted “Honasans” who would not mind giving it a try! Taking into consideration the many hurdles facing the country, its development will not be linear and performance indicators will surely oscillate. But overall, and over time, the country will mature and provide good opportunities.

Watching CNN news and reacting rashly to very localized issues is the wrong approach to a complex and geographically spread country. The situation is not as bad as riot images may lead us to believe, but definitely not as good as a few Jakarta oligarchs may tell you in their luxurious imported cars.

Tocqueville: Thank you, Pierre.

François Sicart

June 2000
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