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Real Estate Heating Up in Indonesia

By KEITH BRADSHER
Published: October 15, 2013

JAKARTA, Indonesia — Gita Wirjawan, Indonesia’s trade minister, made a steeply rising motion with his right hand, like
an airplane soaring into the sky, when asked about the surging real estate market in this country. “Scary, isn’t it?” he said.
But Boediono, the vice president who uses only one name and has been a leading economic policy maker for the last 16 years, was much more sanguine.
“I don’t see so far that the cycle has developed a dangerous bubble,” he said in a separate interview.
“We have taken steps, of course, but if you look at the players, they are well insulated.”
He did not expect that even a recent plunge in the country’s currency would present financial troubles.

Mr. Boediono and Mr. Gita represent different perspectives in an active discussion here over whether Indonesia’s resurgent commercial and residential real estate markets are a cause for jubilation or concern. High rents and prices, at least compared to previous levels in Jakarta, have been the subject of particular scrutiny because real estate helped cause a financial collapse in the late 1990s and because the currency has been one of the hardest hit among emerging markets in recent months.

Rents per square foot for downtown grade B commercial real estate have roughly doubled in local currency terms over the last three years and nearly tripled for scarce grade A space. They have not yet shown signs of weakening, real estate brokers and developers said, even though investors have shifted tens of billions of dollars from emerging markets to the United States and other industrialized countries in response to somewhat higher long-term interest rates there.
But while skyscraper construction projects are slowing or stopped in big Indian cities like Mumbai, tower cranes in Jakarta are still floodlit at night so that workers can keep building long after sunset. The difference reflects continued foreign investment in the Indonesian economy and a diversified domestic economy.

The Lippo Group, the sprawling conglomerate that is one of Indonesia’s largest real estate developers, is still planning to begin preselling offices in two commercial real estate projects in the coming months, which will then take about three years to build. “At this stage, there’s no material evidence the market has gone away,” said Craig Williams, who was the managing director overseeing Lippo’s real estate operations until the end of September.

While Jakarta real estate prices may be rising, they are doing so from a very low base and remain among the cheapest in East Asia. Even after recent appreciation, the rule of thumb here is that condominium prices, at $372 to $418 per square foot, are one-seventh of comparable prices in Singapore and a tenth of comparable prices in Hong Kong, according to the Jakarta office of Cushman Wakefield, a global real estate consultancy and brokerage firm.
Commercial real estate prices are seven times higher per square foot in Singapore than in Jakarta and 14 times higher in costly Hong Kong.

Bank lending to real estate has been heavily regulated ever since the Asian financial crisis in 1997 and 1998. Bank Indonesia, the country’s central bank, now requires commercial banks to get down payments of 30 percent for residential mortgages. Banks commonly demand 50 percent down payments for commercial mortgages, and many demand additional collateral beyond the project itself.
“Now we are more fully in control of bank loans to real estate,” said Difi A. Johansyah, the central bank’s chief spokesman and chief liaison to parliament and the rest of the Indonesian government.

Like London, Tokyo or Paris, Jakarta is a huge metropolis that combines the roles of being the political capital and commercial capital of the country. With 10 million residents plus 2.5 million people who commute in from the suburbs, it is the dominant commercial real estate market in the country, and is also emerging as a market for apartment towers. But demand is outstripping supply because of other limitations imposed on the commercial real estate market.

Fragmented land ownership also makes it hard for developers to accumulate land to put up skyscrapers. Indonesia also does not allow foreigners to own land, and makes it extremely difficult for them to obtain the main type of land lease used
for buildings. Foreigners qualify instead for a kind of junior land lease known as “right of use.” Banks are loath to accept buildings with these junior leases, known as hak pakai, as collateral for mortgages.

Mr. Gita, the trade minister, who is also campaigning for the ruling party’s nomination in next summer’s presidential elections, said he personally favored liberalization of rules for foreign investment in real estate.
“We can learn from countries that have opened up that sector,” he said.
But the front-runner by a wide margin in early polls for the presidential election is the governor of Jakarta, Joko Widodo.
He has established himself as a populist since taking office a year ago, partly by limiting the issuance of high-rise construction permits, a process sometimes tainted by corruption over the years.

Mr. Joko banned in September the construction of any more shopping malls. There are only 173 sprinkled across greater Jakarta, many of them small and rather basic, but they are seen as a threat by merchants in numerous traditional outdoor markets.

American financial institutions most conspicuously missed out on Indonesia’s real estate price spiral of the last several years. They acquired none of the top 27 Class A commercial projects in Jakarta even as they snapped up buildings in other Asian markets, said Todd Lauchlan, the head of the Indonesia office of Jones Lang LaSalle. Indonesians own over 99 percent of the country’s overall commercial real estate market, although there are a few investors from Europe, Japan and Hong Kong, notably Hongkong Land, part of the Jardine Matheson Group.
“It is one of those markets where one needs to have patience and build strong relationships with local partners,” said Robert Garman, the executive director responsible for Southeast Asia at Hongkong Land.

American companies have been more successful in industrial real estate, notably multinationals with long-term goals of selling to Indonesia’s 250 million people. Procter & Gamble acquired a large site here at the bottom of the market several years ago for a diapers factory.

Roughly 85 percent of the offices in Jakarta and 95 percent of the condominiums are occupied by their owners, who almost never want to sell, said David Cheadle, the managing director for Indonesia at Cushman & Wakefield, another global real estate brokerage and consulting firm. “We’ve pretty much seen one private equity fund, one sovereign wealth fund and one institutional investor every month, every 10 days even, and we say to them, ‘It’s a very frustrating market here,’” he said.
“You can’t just walk in here and buy an office building.”

 

 

 
 

Bloomberg

Scot Marciel,
U.S. ambassador
to Indonesia.

Indonesia Can Reach `Sustainable' 8% Economic Growth,
U.S. Ambassador Says

By Greg Ahlstrand and Femi Adi -

Indonesia can achieve economic growth of 8 percent that is driven by
domestic as well as international investment, if regulatory clarity and infrastructure in the country are improved, U.S. Ambassador Scot Marciel said.
“Indonesia’s growing around 6 percent this year,” Marciel said in an interview in his office at the U.S. Embassy in Jakarta. “I think that could reach 8 percent s

Photographer: Dimas Ardian/Bloomberg

“Indonesia’s growing around 6 percent this year,” Marciel said in an interview in his office at the U.S. Embassy in Jakarta. “I think that could reach 8 percent sustainably, without tremendous difficulty, by addressing some of the infrastructure issues and opening up a little bit more.”
President Susilo Bambang Yudhoyono seeks to expand Southeast Asia’s biggest economy by as much as 7.7 percent and create 10.7 million jobs by the end of his second term in 2014, he said in his annual state-of-the-nation address Aug. 16. Indonesia also aims to cut the poverty rate by about a third to between 8 percent and 10 percent over the next four years.
“It’s not so much about making it attractive to foreign investors,” said Marciel, who was named ambassador in August. “To the extent Indonesia can work on infrastructure, and improve transparency and the regulatory environment and battle corruption, it creates a good environment for Indonesian businesses. Then foreign business will also find it attractive.”
Indonesia’s ranking in Transparency International’s 2009 corruption perception index improved to 111 from 126 in 2008, according to the watchdog’s website. It gained one place to 110 this year, 24 slots above the Philippines. The index measures the perceived level of public-sector corruption in 178 countries and territories around the world, the website says.

Roads, Ports, Rails
Inadequate roads, ports and railways mean orange juice from the Indonesian side of Borneo costs more than that from China, four times as far away, the Indonesia Logistics Association said in January. Logistics costs are the equivalent of 25 percent of gross domestic product in Indonesia, versus 19 percent in Thailand and 10 percent in the U.S., it said.
During U.S. President Barack Obama’s visit to Indonesia in November, he and Yudhoyono announced the Comprehensive Partnership, under which the countries will cooperate on education, environmental and climate change issues, defense and security, science and technology, investment and trade.
“We’ve made education a high priority; specifically trying to increase the number of students from Indonesia studying in the United States, and from the United States studying in Indonesia,” Marciel said. “Also to try to build partnerships between universities.”

Scholarship Drive
The U.S. will commit about $165 million over five years to promote cooperation on education, including scholarships such as the Fulbright program, funding for Indonesian students to study at U.S. community colleges and English-language training, Marciel said. Indonesia will provide 100 scholarships for American students to study in Indonesia, he said.
“We need to do a better job of making U.S. education accessible to Indonesians,” he said. “Over the past 10 to 12 years, the number of Indonesian students studying in the U.S. has actually fallen.”
The decrease is partly due to concern over costs, and partly to a “misperception” that a student visa is difficult to get, Marciel said. That misperception stems from revisions to visa procedures implemented after Sept. 11, 2001, he said.
“A lot of the problems or obstacles that came out of that have been dealt with, but the perception remains that it is extremely difficult to get a visa,” Marciel said. “We need to continue to explain to people that it’s very possible.”

Military Cooperation
In July, Defense Secretary Robert Gates said the U.S. will begin a “measured and gradual” relationship with the elite Indonesian military unit known as Kopassus after a 12-year gap. The decision to restore links was possible due to Indonesia’s progress in professionalizing the military since the fall of the dictator Suharto, Gates said at the time.
The move was criticized by New York-based Human Rights Watch, which said it “weakens U.S. standards for military cooperation globally.” U.S. Senate Foreign Relations Committee member Russ Feingold, a Wisconsin Democrat, also said he was “disappointed” by Gates’s announcement.
“Secretary Gates announced in July that we would begin taking limited steps toward re-engagement with Kopassus,” Marciel said. “That had not been possible in the past because of lack of accountability for past human-rights violations.”

Move to Democracy
Marciel said Gates stressed that the decision was based on Indonesia’s move to democracy, improved human rights record, and changes to the military, and that it would start with staff- level talks, which to date has been the extent of the engagement.
Regarding videos that surfaced in October showing men in military clothing torturing Papuan civilians, Marciel said: “The Indonesian leadership has made it clear the human-rights violations depicted in those videos is unacceptable. There’s nothing that I’ve seen that suggests that was Kopassus.”
Indonesian police had assured the U.S. that they were committed to investigating the videos and bringing the perpetrators to justice, he said.
“We are watching this very carefully,” Marciel said.
A challenge the U.S. faces in developing its relationship with Indonesia is convincing Indonesians it doesn’t have a hidden agenda, Marciel said.
“Indonesia is a democracy, and the people and the government have to decide what’s most important to them,” he said.

To contact the reporters on this story: Greg Ahlstrand in Jakarta at gahlstrand@bloomberg.net; Femi Adi in Jakarta at fadi1@bloomberg.net
To contact the editor responsible for this story: Greg Ahlstrand at gahlstrand@bloomberg.net

 


The BRIC Debate: Drop Russia, Add Indonesia?


November 22, 2010
In 2001, three years after Russia's ruble collapsed, Goldman Sachs (GS) named the country a member of the BRICs—Brazil, Russia, India, and China—the emerging markets it said would be four of the most dominant economies by 2050. Over the next several years, BRIC-fixated investors piled into Russia as its resource economy thrived in the era of fast-rising oil prices. The BRIC concept still asserts its power. Investors in the $48 billion iShares MSCI Emerging Markets Index Fund (EEM), for example, have nearly half their money weighted in BRIC stocks.

For plenty of money managers and economists, however, the Russo euphoria is all but gone. From Nouriel Roubini to Morgan Stanley, they are calling either for Russia to be ousted from the BRICs altogether in favor of Indonesia or, at the least, for Indonesia to join the other four. They are put off by the policymaking drift in the Kremlin, Russia's demographic atrophy, and endemic corruption.

Indonesia's fiscal prudence, economic growth—6 percent this year, according to the International Monetary Fund—and strengthening social and political institutions have far more appeal. Twice-elected President Susilo Bambang Yudhoyono has directed funding toward schools and health care, and Indonesia's coffers are full enough to put the onetime IMF bailout case on the brink of an investment-grade credit rating.

Russia, for its part, cannot seem to escape the investor-unfriendly headlines. Sweden's Ikea has leased diesel generators to circumvent Russian bureaucrats who allegedly demanded bribes to provide electricity to the chain's stores. Then the Swedish retailer revealed that the Ikea executives in charge of leasing the generators were taking bribes, too. Petro oligarch Mikhail Khodorkovsky has been in jail on fraud charges since 2003: His supporters say the charges were trumped up to give the Kremlin an excuse to seize his company. (The government denies this; Khodorkovsky is on trial for fresh charges.) William Browder, chief executive officer of Hermitage Capital Management, once Russia's top foreign investor, was banned from the country in 2006 for tax evasion: He says his company was grabbed by criminals who pulled off the tax scam. "Russia is just not a good place to put your money," says Richard Shaw, managing principal of QVM Group, a South Glastonbury (Conn.) investment advisory.

Shaw says he avoids putting clients in Russian stocks and funds, and steers clear of BRIC-linked investments because of their Russia exposure. He would rather own Indonesian exchange-traded funds: "While Indonesia isn't a paragon of virtue, it's better, especially to participate in the Asian boom." Although some investors want BIIC to replace BRIC, Shaw votes for BICI (pronounced BEE-chee): "It's catchy—kind of sounds like an Italian purse."

Indonesia, the world's fourth-most-populous country and largest Muslim democracy, has corruption, too. In part, that's a legacy of the Suharto dictatorship that ended in 1998. Yet Tom Lydon, president of Global Trends Investments, says the Asian nation has more going for it than Russia. "Beyond natural resources, it is supported by improving domestic consumption, and anticorruption efforts appear to be working." Indonesia has sentenced several politicians and former ministers for corruption. In its latest Global Competitiveness Report, the World Economic Forum ranked Indonesia 44th out of 139 countries—up from No. 54 the prior year. (Russia came in at No. 63.)

While Morgan Stanley (MS) has called for Indonesia to join the BRICs—Goldman has called the country a "Next-11" nation, in a runner-up list of sorts—economist Nouriel Roubini of New York University has argued that Indonesia should replace Russia in the bloc. "From an American perspective," he wrote last year in a column, "Indonesia is an attractive alternative to Russia, which has vied with Venezuela for leadership of the 'America in decline' cheering section."

The iShares ETF allocates just 2.6 percent of its money to Indonesia. That will change, say Indonesia backers; 12 years after its financial crisis the archipelago is China's third-largest trading partner, foreign investment has more than tripled since 2004, and gross domestic product is growing faster than Russia's. While Russia's Micex index has fallen 22 percent from its December 2007 peak, the Jakarta Composite Index is approaching an all-time high. Russia's market fortunes have fallen so low that some investors are taking a second look, especially since Russian corporate profits have been robust. "Russia really stands out as being cheap and attractive," says Maarten-Jan Bakkum, an emerging-market equity strategist at ING Investment Management in The Hague.

Indonesia's supporters say that over the long haul the Asia nation has the edge. More than half of the population is under 30, while aging Russia faces a paucity of productive labor. The Kremlin may have to commit increasing sums to care for the elderly, says Wijayanto, managing director of the Paramadina Public Policy Institute in Jakarta. "Indonesia," he says, "has the potential to become a key global player."

The bottom line: Russia's inability to develop into a mature economy has prompted investors to call for the country's removal from the BRIC group.

Bloomberg Businessweek Senior Writer Farzad covers Wall Street and international finance.

 

 

 




The Future of Economic Reforms in Indonesia after SBY Wins Landslide

Indonesian President SBY - Can he fulfill the high hopes?
Credit: Ritongamulia


Indonesian President Susilo Bambang Yudhoyono

Jakarta, Indonesia, 4 August 2009. With the landslide re-election of Indonesian President Susilo Bambang Yudhoyono to a second term as Indonesian President, backed by a strong showing for his party in parliament, hopes are high that the pace of economic reforms can be increased.

It is not an easy job. This huge nation of 17,508 islands, over 300 ethno-linguistic groups and a population of 237 million suffers from chronic corruption, social and cultural instability, and economic disparity. Much of the wealth is held by only a few, leaving the poor wondering where their nation's rich natural resources have gone.

It is a massive challenge to manage, but President Yudhoyono, known locally as SBY, has won plaudits for his steady hand and (admittedly) slow economic reforms. His anti-corruption commission has been so successful that the members of parliament and the police, considered the two worst institutions, are plotting ways to stop it working. With SBY's strong mandate, there are hopes that the commission will be both protected and expanded

Traditionally, the government has been military-backed, as seen in the infamous Suharto regime. The main challenger, Megawati, was in many ways the hier of that era, and selected a military running-mate (Prabaowo Subianto).

Yudhoyono himself was a Suharto-era general, but he has distanced himself from the military and is now focused on strengthening an economy that is increasingly independent of the once all-powerful army. This, along with his promised reforms led to him winning a landslide election in July for a second term. Consequently, all eyes are on him and his party to bring in foreign investment, develop its third-world infrastructure, and continue its rate of growth.

As if to emphasise this, his choice for Vice President, Boediono, is a former Bank of Indonesia Governor and Finance Minister. His stated aim is to achieve average GDP growth of seven per cent a year for the next five years. This growth will see unemployment reduced from 8.1 per cent in 2009 to a range of five to six per cent. In addition to attracting foreign investment and reducing corruption, Boediono is targeting an increase in social safety nets to further boost consumer spending and tackle endemic poverty - about 32 million people live on less than 70 cents per day, and they urgently need help.Foreign investment could indeed be key to ensuring long-term, sustainable growth. Many firms are unable to cope in the Indonesian business climate and simply do not understand the creative (corrupt) ways the most successful companies operate there.

After the 1997-1998 Asian Financial Crisis, the IMF stepped in and attempted to restructure the nation's financial system. The IMF was so hated here and elsewhere in Asia that the loan was paid off early, and Indonesians promised themselves never to have to submit to outsiders 'austerity' measures again. This led to Indonesia amassing around $40 billion in foreign exchange reserves, acting as a buffer for future economic crises.

This experience with economic meltdown and then recovery has put Indonesia in a better position than many of its neighbors to weather the current storm.

Its high commodity prices between 2004-2007 also aided it in recovery from the crippling crisis. And because the nation only exports about 20% of its GDP, it is protected when its trading partners slash imports. Again, this is unlike many others in Asia, like Singapore, Japan, and Korea, who rely heavily on exports.

Domestic consumption has proven to be a much more reliable economic base, spread out among its 237 million people.

And falling gas and oil prices have helped the population cope with otherwise higher costs of living. Overall, Indonesia is forecast to grow by 3.5 percent this year, according to the IMF. SBY has come and said he expects GDP to grow 5 per cent in 2010, which would be an excellent - and achievable - result.

This years budget includes increased provisions for infrastructure and civil service reform, areas that have long held back the nation. Education spending has been increased, another vital area considering high illiteracy rates on many smaller islands. The military budget has also grown, but that seems a fair compromise to most as long as the armed forces stay in their barracks and continue to divest out of their economic enterprises.

Although the recent terrorist attacks show how vulnerable Indonesia is politically, the strong government response has prompted Citibank to say that the Indonesian economy will not be harmed by the hotel bombings.

Despite the risks, the World Bank has said that Indonesia will be a 'winner' from the changing landscape of the global down turn. Hundreds of millions of people and a fair few investors are all rooting for SBY to prove them right.

Dwayne Ramakrishnan, EconomyWatch.com

 

 

 


Indonesia Outpaced in Ease of Business


Dion Bisara & Francezka Nangoy |
November 05, 2010


Jakarta. The country’s efforts to improve its business climate and attract more investment may seem to be in top gear, but neighboring countries are sprinting past, a World Bank-endorsed study shows.
The Doing Business 2011 list, released by the International Finance Corporation, a private investment arm of the Washington-based World Bank, showed that Indonesia ranked 121st out of 183 countries in terms of overall ease of
doing business, six places lower than last year.

Singapore tops the list, while Thailand is 19th, Malaysia 21st, Vietnam 78th and Brunei 112th. Behind Indonesia were Cambodia, the Philippines and Laos.
The study, which measures and compares regulations relevant to the life cycle of a small- to medium-sized domestic business in 183 economies, showed that countries in East Asia and the Pacific were among those that took the most steps to make it easier for local companies to operate.

Indonesia, Southeast Asia’s largest economy, ranked 155th in the subcategory of starting a business, 60th for dealing with construction permits, 98th for registering property, 116th for getting loans, 44th for protecting investors, 130th for paying taxes, 47th for trading across borders, 154th for enforcing contracts and 142nd for closing a business.
Indonesia moved up the rankings only in starting a business and trading across borders. “Many economies are reforming in the same areas as Indonesia and others have been reforming more vigorously,” the World Bank said in an official statement.

Sofyan Wanandi, chairman of the Indonesian Employers Association (Apindo), said the drop in overall ranking was inevitable because other countries kept making big improvements while Indonesia still had a lot of “homework” to do.
“Indonesian bureaucrats complicate business in this country, not only in the capital but also in the regions,” he said.


“In addition, legal certainty is still weak.” ?Takashi Nakayama, president director of the Japan External Trade Organization in Indonesia, said tax issues were a key factor that hampered investment in Indonesia and illustrated the legal uncertainties that many companies face here.

The World Bank nonetheless praised the country’s single-window system for cutting the red tape involved in selling Indonesian products overseas?.

A move to cut corporate income tax, the bank added, “will help to persuade more businesses to comply with the more favorable rules.”

It also said other factors like size of regional and domestic markets, presence of natural resources, availability of skilled workers, quality infrastructure and social and economic stability played an important part in helping investors plan their moves.

“Each of these factors presents its own set of challenges which Indonesia has been steadily addressing in its effort to attract more quality investment,” it said.

The World Bank said Indonesia should also learn from its neighbors, particularly in adopting technology to untangle its bureaucracy and stay competitive

 

 

ASIAN DEVELOPMENT BANK AND INDONESIA

INDONESIA FACT SHEET

Indonesia has experienced strong economic expansion since recovering from the 1997 Asian financial crisis. Economic growth accelerated to a 10-year high of 6.3% in 2007 and a respectable 4.5% in 2009, making the country one of the best performers
within the global recession. At the end of December 2009, international reserves rose to an all-time high of $66.1 billion, or 7.1 months of merchandise imports. Confidence in the country’s reserves was further bolstered by substantial currency swap agreements in the total amount of more than $30 billion.

The overall fiscal deficit for 2009 was 1.6% of gross domestic product (GDP) and included a substantial fiscal stimulus.
Indonesia’s debt-to-GDP ratio has continuously declined from 57% in 2004 to 28% by the end of 2009Robust economic growth prior to the crisis and sound macroeconomic management during the crisis are reflected in Indonesia’s employment numbers. Indonesia’s unemployment rate shrank from 11.2% in 2005—the highest rate in the last 5 years—to 7.9% in August 2009.

However, poverty remains challenging, with 14.1% of Indonesians living below the national poverty line while the informal sector accounts for about 70% of the workforce.

GDP growth is forecast to accelerate to 5.5% in 2010 driven by domestic consumption and a recovering global economy. Under its 2010-2014 Medium-Term Development Plan, the government identified 11 national priorities: (i) bureaucracy reform and good governance;

(ii) education; (iii) health; (iv) reducing poverty; (v) food security; (vi) infrastructure;
(vii) investment and business climate; (viii) energy; (ix) environment and overcoming disasters;
(x) less developed, border, and post-conflict regions; and (xi) culture, creativity, and technological
innovations..

 

Table 1. Indonesia: Development

 

Indicators

 

Non-MDG

 

Population in millions

231.37 (2009)

Annual population

 

growth rate (%)

1.3 (2007–2009)

Adult literacy rate (%)

92.0 (2006)

Percent of population

 

in urban areas

51.5 (2008)

MDG

 

Percent of population living

 

on less than $1.25 a day

29.4 (2007)

Percent of population living

 

below the national poverty

 

line

14.2 (2009)

Under-5 mortality rate per

 

1,000 live births

41 (2008)

Percent of population using

 

an improved drinking water

 

source

80 (2006)

… = data not available, MDG = Millennium Development Goal.

 

Sources: ADB. 2010. Basic Statistics 2010. Manila.

 

UNESCO. 2010. Institute for Statistics Data Centre.

 

World Bank. 2010. W

 

 REPORT IN PDF

 

 


Indonesia’s Economy: Strong with Room for Improvements

By Thomas Rumbaugh, Laura Lipscomb
IMF Asia and Pacific Department

September 17, 2010

* Prudent economic management steered Indonesia through crisis
* Need to build on improved financial sector stability
* Better infrastructure, targeted subsidies, social services vital for long-term growth

Indonesia is likely to experience accelerating economic expansion—with 6 percent growth predicted for 2010 and 2011—but the IMF has warned about the threat of inflationary pressures.

In their annual health check of Southeast Asia’s largest economy, IMF economists said Indonesia had emerged strongly from the global financial crisis due to robust domestic consumption and investment, and greater exports.

Last year Indonesia was the only country in the Group of 20 leading economies to lower its public debt-to-GDP ratio—a reflection of improved economic management over recent years, as well as appropriate policy responses during the crisis. But continued economic recovery has put upward pressure on prices.
The central bank needs to take a proactive approach to keeping inflation in check. Maintaining low inflation would help lower borrowing costs, supporting growth.

Inflation expectations for 2011 are currently at the top end of the 4—6 percent target range and could move higher. Since the crisis, the central bank has kept interest rates low, but in their report the IMF economists said it now needed to meet expectations that inflation would be kept within the target range.

Rapid growth attracts foreign funds
The country’s strong performance has attracted foreign investors who have been pouring into the country’s local government debt markets since mid-2009. However, Indonesia remains vulnerable to swings in investor sentiment. During the European debt crisis earlier this year, a large amount of foreign funds left Indonesia.

The authorities responded by allowing the exchange rate to adjust, while intervening to smooth sharp moves in the level of the Indonesian rupiah. They also announced regulations to reduce swift outflows in the future.
In their report, which followed a 10-day trip to the country in June, the IMF economists noted that funds had returned, but said this experience of capital flight underscored the need for preparedness. They called on the central bank to strengthen its balance sheet in coordination with the government, so that it would have more room for maneuver in the event of future volatility.

Improving the strength of the financial sector
The IMF also identified financial sector reforms to reduce future risks. This sector proved its resilience during the global downturn, and the banking system currently benefits from a large capital buffer and high profitability. However, the IMF suggested that Indonesia could improve the regulatory framework to ensure effective monitoring of important banks and financial conglomerates.

“Addressing weaknesses in the legal and institutional framework, governance, and protection for supervisors is needed to improve financial stability,” the economists stated in their report. They added that the government’s adoption of the Financial System Safety Net law, which would clarify the responsibilities of various regulatory agencies, was crucial to achieving greater financial stability.
The economists also suggested ways to create a deeper capital market, for example, by publicly listing state-owned enterprise shares. “Developing the capital market could help better channel foreign investor inflows into productive uses in the economy,” said Rumbaugh.

Next steps for promoting growth
The IMF economists identified some additional key areas to sustain the country’s strong performance.

• Bolstering monetary policy credibility. Continued effective communication of a proactive monetary stance would signal a commitment to lower inflation and reduce the volatility of inflation to levels comparable to that of Indonesia’s trading partners.

• Improving the financial regulatory framework. Strengthening supervision and governance structures in financial institutions are essential to enhanced stability. Stronger enforcement of creditor rights and developing a deeper capital market would help improve financial intermediation and promote long-term investment.

• Mobilizing government spending to support productive investments. While conservative government spending has put Indonesia in a good position in terms of public debt, the government needs to spend money on improving the country’s infrastructure (roads, railways, power plants) to support sustained growth.

Currently a significant portion of the annual budget goes to energy subsidies, which are politically popular but not well targeted at the poor. A better policy would be to improve social services and transfers directly to the poor, while investing in the country’s infrastructure needs, said the IMF economists.

 

 

 

 THE NEW RULERS OF THE WORLD

 

 

THE WORLD BANK AND INDONESIAN DEVELOPMENT

Frances J. Seymour
Hariadi Kartodihardjo

The Government of Indonesia under the
Suharto regime enjoyed a special relationship
with the World Bank.

I n 1997, two conflagrations swept through Indonesia. Forest fires burned out of control across the archipelago, destroying millions of hectares of forest, causing billions of dollars worth of economic losses, and blanketing the region in a choking
haze (Barber and Schweithelm, 2000).
Even as the literal fires burned, the Indonesian currency figuratively went up in flames—losing 80 percent of its value over four months in late 1997—consuming the savings, purchasing power, and employment prospects of millions of Indonesians. While each of these crises has been attributed to proximate causes—drought and land clearing in the case of the forest fires, financial contagion in the case of the rupiah’s collapse—both had deep and intertwined structural roots in Indonesia’s political economy as well.

This chapter will examine how the World Bank, in collaboration with the IMF, attempted to address some of the structural issues in the forest sector through adjustment lending mobilized in the wake of the financial crisis.1

BACKGROUND
The World Bank and Indonesian Development

The Government of Indonesia under the Suharto regime enjoyed a special relationship with the World Bank. To address the challenges and opportunities of Indonesian development, in the late 1960s World Bank President Robert McNamara established a resident staff in Indonesia that reported directly to his office.

For the next three decades, “World Bank involvement in the country’s development efforts was pervasive, and the achievements were many” (World Bank, 1999a, p. ii). These achievements included almost 30 years of uninterrupted growth, which by the early 1990s had vaulted Indonesia into the ranks of the emerging market economies.
Thanks in part to World Bank-supported investment in agriculture, infrastructure, health, and education, declining
poverty and improving social indicators accompanied the rapid growth. According to a recent history of the World Bank, “Indonesia was the presidentially designatedjewel in the Bank’s operational crown”
(Kapur, Lewis, and Webb, 1997, p. 493).


Not everyone shared the World Bank’s enthusiasm
for the Indonesian development model

A group of U.S.-trained technocrats in government service, the so-called Berkeley Mafia, steered the Indonesian economy through periodic macroeconomic adjustments in the 1970s and 1980s, and managed a gradual liberalization of trade and investment rules in the 1990s.

The World Bank supported those adjustments through policybased lending, but these loans were usually made in return for government actions already taken, rather than conditioned on future actions. Thus, Indonesia was never subjected to
a harsh structural adjustment program, such as those imposed by the World Bank in other countries. However, not everyone shared the World Bank’s enthusiasm for the Indonesian development model.

Human rights groups condemned Indonesia’s brutal invasion of East Timor in 1975, and its repression of civil and
political liberties throughout the archipelago. Under the Suharto regime, being labeled an “obstacle to development” (penghambat pembangunan) was tantamount to a subversion charge.
In the early 1980s, international attention was focused on the destruction visited on tropical forests and indigenous peoples by Indonesia’s transmigration program, financed in part by the World Bank, which sponsored migrants from the densely-populated islands of Java and Bali to the outer islands of Sumatra, Kalimantan, and Irian Jaya.

A subsequent international advocacy campaign targeted the World Bank-supported Kedung Ombo Dam in Central Java, where the involuntary resettlement of villagers in the inundation area had led to systematic human rights violations.

The World Bank’s lack of responsiveness to early reports of abuse uncovered by Indonesian nongovernmental organizations caused many to question World Bank support for the Suharto regime’s version of development.

Over time, the World Bank’s program in Indonesia increased its attention to environmental and social issues, both in the implementation of so-called safeguard policies— such as those requiring special attention to resettlement—and through greater social and environment sector lending. This increased attention was likely fueled by Indonesia-specific factors, such as a desire not to repeat the Kedung Ombo debacle, as well as broader forces operating in the World Bank overall.
In 1993, the World Bank’s office in Jakarta established a special unit to address environmental and social issues.
It was headed by a senior official with extensive experience in Indonesia, and staffed to provide environmental expertise, social analysis, and outreach to the NGO community.

By the late 1990s, external critics of Indonesia’s World Bank-supported development strategy had begun to focus on corruption. Following World Bank President James Wolfensohn’s speech at the 1996 Annual Meetings of the World Bank and the IMF, which tied fighting corruption to the World Bank’s anti-poverty agenda, the corruption issue could no longer be considered off-limits. 3 In mid-1997, the World Bank denied allegations of large-scale leakage of World Bank project funds in Indonesia, although an internal investigation later confirmed the allegations (Simpson and Phillips, 1998).

When the financial crisis hit, many critics pointed to the structural weaknesses in Indonesia’s economy, particularly the pervasive corruption and cronyism, to explain the country’s initial vulnerability to financial contagion and the depth of the ensuing crisis. In February 1999, the World Bank’s internal evaluation department reported that the World Bank’s inattention to poor governance and other structural issues had undermined the effectiveness of its assistance to Indonesia over the previous decade, which the report rated as only marginally satisfactory (World Bank, 1999a).

Until the events of mid-1997, the World Bank considered Indonesia to be a model among borrower governments, and Indonesian government officials had a collegial relationship with their World Bank counterparts.
Criticism by nongovernmental organizations (NGOs) of the environmental damage and human rights abuses associated with World Bank-supported projects had led to increased attention to these issues, but not to a fundamental change in the relationship.

The perception that the World Bank had been complicit in maintaining a regime characterized by pervasive corruption
and poor governance compromised the institution’s credibility in responding to the 1997 crisis
(Simpson and Phillips, 1998; Brauchli, 1998).

 

Indonesia: History of a bankruptcy orchestrated by IMF and the World Bank

 


The thousand-profit colony

Excerpt

Indonesia’s fame as the Spice Islands goes back to the 16th Century. The Portuguese marketed the cloves and nutmeg produced in the Moluccas. Profits were high, and the Dutch took over the island by fire and sword. They ruled it from 1605. Since then, almost all the Indonesian islands, explored little by little, became the preserve of the Netherlands. Trade exchanges took root and the Dutch brought in new plants such as the coffee tree, indigo, and sugar cane...

During the Second World War, the Japanese invaded the Indonesian islands, after the attack on Pearl Harbor in December 1941. This period saw the growth of a strong movement for Indonesian independence. Three days after the Japanese surrender, Sukarno and Mohamed Hatta proclaimed Indonesian independence, on 17 August 1945. But, after the war ended, the Allies occupied the archipelago and waited for the Dutch to return. The former colonial masters found themselves in an uncomfortable position as the clamour for independence grew. The era of empires was drawing to a close.

In 1947, Indonesia was the focus of a particularly controversial episode in World Bank history.

The Bank granted a 195-million-dollar loan to the Netherlands while the Dutch government was conducting an offensive against Indonesian nationalists. This was the second loan the World granted in its history. Two weeks before approval of this loan, the Netherlands launched their offensive. Over the two following years, there were as many as 145 000 Dutch occupying troops: it was a large-scale operation, and hard to keep under cover. Although the UN declared a cease-fire in 1948, the Dutch launched several land and air attacks. There was a hue and cry at the UN and in the United States, harshly criticising Dutch policy in Indonesia and Bank involvement.

The latter responded that the loan had been granted to the Dutch government for spending to be made in the Netherlands. The critics shot back that since money was fungible, the Dutch government could use the Bank loan in support of its military effort in Indonesia |1|.

The United States realised that the aid they were granting to the Netherlands (400 million dollars) through the Marshall Plan was indirectly funnelled to the military and police intervention in Indonesia. When they did, they got the UN to host talks at The Hague, in August 1949, and sovereignty transfer was signed on 27 December. Indonesia became a Republic and Sukarno was elected President.

 

 

 

An overview of

Development of the Republic of Indonesia in a Global context

Global Relations


In the global context Indonesia relations have been closely interwoven with AA countries and the West (especially the US).
In the 1950s, the first period of independence. Indonesia became a domino in the Cold War struggle between the US and its
western allies against the Soviet Union representing communism.

The Sukarno years were dominated by Cold War intrigues.
Because of its politically strategic location and its wealth of natural resources the US considered Indonesia a vital link in its
Cold War struggle. Independence, non-alignment were the principles President Sukarno stood for.
Sukarno's unwillingness to side with the West, upholding a neutral stand made him a vicious target of the West.

His neutralist stand made him a relentless vicious target of the West starting with covert operations in the mid-fifties.
In 1965 they succeeded to bring him down and have him replaced by Suharto, a staunch supporter of the West.
The US and UK played a dominant role with support of Australia.
He became a victim of Western intrigues and covert operations, ultimately leading to the downfall of the independent minded
First President of the Republic of Indonesia. From then on the Western powers, the US & United Kingdom and Australia continued their efforts to control Indonesia, their political leaders and the economy.

After Sukarno's replacement by Suharto, a staunch ally of the West, led by the US and the United Kingdom, supported by Australia stepped up their efforts to control the country and its economic destiny, using the US controlled financial institutions like World Bank/IMF

Major development and investment projects were implemented . Tied aid for prjects, tying aid funds to spending in the donor country, financed major infrastructural projects. Foreign investments projects were negotiated with little regard for the environment. A pattern of creating and sustaining a politcal elite.The US, UK, Holland, Germany and Japan competed for infrastructural and large industrial projects, creating, sustaining and eenriching a political elite to serve their interests resulted in their economic dominance and exploitation, providing selfserving tied "AID" awhich fostered deeprooted corruption. The country's wealth of natural resources attracted wide global interests which exploded in the late 1960's and 1970's

Impact on Development & Issues

Indonesia's wealth of natural resources has attracted wide global investment interests, exploding in the late 1960's, early 1970's. Under the guise of aiding the country's economic development massive loans were generated for infrastructural development, oil and mining explorations, in fact leading to a foreign corporate takeover of the country

 

The foreign investment influx has benefited the country's economic and infrastructural development, often however at the cost of national integrity as allocations were awarded with under the table handshakes. This fostered a massive growth of corruption so deeprooted that it will take at least a generation to eradicate.

Project aid programs in the form of loans to Indonesia, also benefited the economy of the socalled "donor countries".
The loans were tied to purchase of goods and services from the donor country.
Thus their manufacturing industries benefited as well from the loans provided by their government for the development of Indonesia and there was intensive competition to obtain project allocations.

Awards most often comprised national integrity and fostered the growth of deeprooted corruption benefiting the ruling elite, spreading downward to all levels

.

 

ECONOMIC DEVELOPMENT SINCE THE 1970'S

 

After President Suharto took office in 1967
US-Indonesia relations improved tremendously
and US investment grew as never before.
Almost overnight the Indonesian government went
from being a fierce voice for cold war neutrality and anti-imperialism
to a quiet, compliant partner of the U.S. world orde
r.

 

The Time-Life Corporation

sponsored an extraordinary conference in Geneva which,
in the course of a week, designed the
corporate takeover of Indonesia.

 


In the Suharto period relations with US and other Western countries changed overnight, foreign investment grew,
project and development aid flew in abundantly, stimulating development and corruption. Project aid funds where
highly focused on infrastructure development to facilitate foreign corporate investment operations, not specifically
the country's needs.

 

 

 

 PROJECT AID WAS MOSTLY TIED AID. AID FUNDS HAD TO BE SPEND IN THE DONOR COUNTRY.
IGGI AID IS OFTEN CONSIDERED WELFARE MONEY FOR INDONESIA.

IT IS CONVENIENTLY FORGOTTEN THAT THE TIED AID PROVISION
HUGELY BENEFITED THE DONOR COUNTRY AS WELL.

Project aid provided through IGGI was mainly TIED, the "Aid funds" had to be spent in the donor country.
The rush to win costly infrastructure projects resulted in highlevel briberies in dealings with a select power elite, stimulating corruption, which, stretching over an extended period of years. took deep roots in society.

In short, foreign corporate greed took over the development of Indonesia, fattening corporate profits and the pockets of an
elite power group supported by financial institutions like the IMF and World Bank.

 

Jakarta 1967 Green - Nixon

1967 - Richard Nixon : "Greatest Prize"

By 1967, Richard Nixon was describing Indonesia
as
"the greatest prize in the Southeast Asian area."

Richard Nixon highlighted the major factor driving US policy
towards Indonesia when, in 1967, he noted that "
with its
100 million people and its 3,000 mile arc of islands containing
the region's richest hoard of natural resources, Indonesia
constitutes the "greatest prize in the Southeast Asia area’".

1)

His assessment came after the Indonesian military had, in 1965, suppressed the Indonesian communist party, the PKI, and carried out a massacre of alleged communists, which had left hundreds of thousands of people dead, and had removed President Sukarno from power. In November 1967, Western business leaders met the new Indonesian leadership in Geneva to divide up the spoils of victory – the economic assets Nixon spoke of – and begin the exploitation of the country's wealth, which Sukarno had resisted.

2)

Indonesia's value to the West has, though, always gone beyond its economic significance. As the world's largest Islamic country and fifth most populous nation, it was arguably the most important country in Southeast Asia.

 

 

UNDERSTANDING THE ASPECTS OF 'AID"

 In Sukarno's words:

I am often asked about my alleged anti-Americanism.
Over the years I have desperately wanted to be
America's friend, but she wouldn't let me.

She repeatedly mistakes foreign aid for friendship

(quoted from "Sukarno: An Autobiography "
by Cindy Adams page 295)
:

 

The following January 22, 1965 statement of President Johnson
on
military aid is a clear reflection of the purpose of US aid
(military or otherwise):

" all U.S. military assistance going to Indonesia is being provided
because it is in
our national interest, not theirs

Military aid, as US President Johnson so bluntly stated : was intended to "serve the interest of the US and not of Indonesia".
That, in summary, is what aid is all about, interests of the donor country prevailing over those of the receiving country, aid with political and economic strings attached. This principle has been applied through socalled aid programs, mostly provided with political ties attached, mostly favoring strong (financial) relations with a select power elite to obtain the desired results.


The downfall of Sukarno, a President who did not accept the political restrictions and obligations tied to Western aid.
who in 1964 told the US : "Go to hell with your aid", is a black page in the history of Indonesian-Western relations.

 

President Sukarno was forced out of office and branded a communist (a valid Western reason for getting rid of a an unwanted
political opponent).


President Suharto and a select group of US educated economists were used to make the Indonesian economy a slave of foreign corporate greed, enriching the select Indonesian elite and thereby fostering deeprooted corruption , fattening the profits of international corporations, fattening the pockets of a select elite.

 

 

 

After President Suharto took office in 1967
US-Indonesia relations improved tremendously
and US investment grew as never before.
Almost overnight the Indonesian government went
from being a fierce voice for cold war neutrality and anti-imperialism
to a quiet, compliant partner of the U.S. world orde
r.

 

The Time-Life Corporation

sponsored an extraordinary conference in Geneva which,
in the course of a week, designed the
corporate takeover of Indonesia.

 


In the Suharto period relations with US and other Western countries changed overnight, foreign investment grew,
project and development aid flew in abundantly, stimulating development and corruption. Project aid funds where
highly focused on infrastructure development to facilitate foreign corporate investment operations, not specifically
the country's needs.

 

 

 

 PROJECT AID WAS MOSTLY TIED AID. AID FUNDS HAD TO BE SPEND IN THE DONOR COUNTRY.
IGGI AID IS OFTEN CONSIDERED WELFARE MONEY FOR INDONESIA.

IT IS CONVENIENTLY FORGOTTEN THAT THE TIED AID PROVISION
HUGELY BENEFITED THE DONOR COUNTRY AS WELL.

Project aid provided through IGGI was mainly TIED, the "Aid funds" had to be spent in the donor country.
The rush to win costly infrastructure projects resulted in highlevel briberies in dealings with a select power elite, stimulating corruption, which, stretching over an extended period of years. took deep roots in society.

In short, foreign corporate greed took over the development of Indonesia, fattening corporate profits and the pockets of an
elite power group supported by financial institutions like the IMF and World Bank.

 

 

 

Globalisation in Indonesia: Spoils of a Massacre
(Excerpt)
report by John Pilger,

In November 1967, following the capture of the "greatest prize", the booty was handed out.
The Time-Life Corporation sponsored an extraordinary conference in Geneva which, in the course of a week, designed the corporate takeover of Indonesia.

 

 

It was attended by the most important businessmen in the world, the likes of David Rockefeller,
and all the giants of western capitalism were represented.

They included the major oil companies and banks, General Motors, Imperial Chemical Industries,
British Leyland, British-American Tobacco, American Express, Siemens, Goodyear,
the International Paper Corporation, US Steel.

(see below)

 

Indonesia 1965: Sukarno - The Greatest Prize - Rockefeller

The Time-Life Corporation sponsored an extraordinary conference in Geneva which, in the course of three days, designed the corporate takeover of Indonesia. The participants included the most powerful capitalists in the world, the likes of David Rockefeller.

All the corporate giants of the West were represented: the major oil companies and banks, General Motors, Imperial Chemical Industries, British Leyland, British-American Tobacco, American Express, Siemens, Goodyear, the International Paper Corporation, US Steel. Across the table were Suharto's men, whom Rockefeller called 'Indonesia's top economic team'.

The Freeport Company got a mountain of copper in West Papua (Henry Kissinger is currently on the board). An American and European consortium got West Papua's nickel. The giant Alcoa company got the biggest slice of Indonesia's bauxite. A group of American, Japanese and French companies got the tropical forests of Sumatra, West Papua and Kalimantan. A Foreign Investment Law, hurried on to the statutes by Suharto, made this plunder tax-free for at least five years.

Real, and secret, control of the Indonesian economy passed to the Inter-Governmental Group on Indonesia (IGGI), whose principal members were the US, Canada, Europe and Australia and, most importantly, the International Monetary Fund and the World Bank...

Under Sukarno, Indonesia had had few debts; he had thrown out the World Bank, limited the power of the oil companies and publicly told the Americans to 'go to hell' with their loans. Now the big loans rolled in, mostly from the World Bank, which had the job of tutoring the 'model pupil' on behalf of the IGGI godfathers.
'Indonesia,' said an official of the bank, 'is the best thing that's happened to Uncle Sam since World War Two.'

 

 

Inter-Governmental Group on Indonesia (IGGI)
An international group of lenders established in 1967 by the Netherlands to coordinate multilateral aid to Indonesia. The other members included the Asian Development Bank, International Monetary Fund (q.v.), United Nations Development Programme, World Bank (q.v.), Australia, Belgium, Britain, Canada, France, Germany, Italy, Japan, New Zealand, Switzerland, and the United States. In March 1992, Indonesia announced that it was rejecting further IGGI aid as long as the Netherlands chaired the organization. IGGI was replaced by the Consultative Group on Indonesia (q.v.).

 

IGGI Aid Eases Pressure

Source: AFP. Date: 13 June 91.
Dateline: Jakarta.

NEW AID PLEDGE RELIEVES PRESSURES ON INDONESIAN ECONOMY

A new 4.75 billion dollar international aid pledge will take some of the pressure off the fragile Indonesian economy,
which faces balance of payments and inflationary problems, analysts said Thursday.
The amount, a record for aid given to Indonesia in any one year, was agreed to Wednesday in The Hague after a
two-day meeting of the Inter-Governmental Group on Indonesia (IGGI).

One billion dollars is to be granted in the form of fast-disbursing soft loans, to strengthen Indonesia's balance of
payments, while the rest will come in the form of project-related credits and grants, officials said.
In addition, Japan's Export and Import Bank announced Wednesday that it would provide 500 million dollars in loans
to small and medium enterprises, outside the IGGI program.

The IGGI package "shows that there is still faith in the use of (foreign) funds for our development," President Suharto
said Thursday.
Indonesia's total outstanding debt was officially put at just over 50 billion dollars, including 42 billion incurred by the
government, at the end of 1990.
A falling international price for oil, Indonesia's main export, since the end of the Gulf war has caused concerns about the government's ability to maintain an economic growth rate of seven per cent, the average for the last three years.

The rapid growth has put pressure on consumer prices and the government has had trouble keeping inflation -- which
ran close to 10 per cent last year -- in single digits.
Local newspapers quoted Coordinating Minister for the Economy Radius Prawiro, who led the Indonesian team to the IGGI talks, as saying that Indonesia badly needed the fast-disbursing loans because of the balance of payments problem.

The current account deficit could swell to 4.3 billion dollars in the fiscal year ending next March 31 from 3.8 billion dollars
in the 1990-91 fiscal year, he said.
But officials of IGGI, which groups 14 donor countries and four international institutions, warned that Indonesia should not
expect donor countries to remain as generous in coming years.

Editor's note:

The "generosity" of the donor countries benefited Itheir own industry as well, because the so "generously" provided aid funds were tied to purchase of goods and services from the donor country.
This aspect was never reflected in mainstream media reports.