Indonesia’s Bashed Bric Hurl

Indonesian shares finished a lackluster quarter as the BRICS summit passed in New Delhi with no invitation for group entry and mass protests erupted against long-telegraphed fuels subsidy cuts to keep the budget deficit at 2 percent of GDP. Investors were already dubious about premium valuations over the regional norm and the corporate governance defects highlighted by the board of directors fight in major listing Bumi Coal where the family owners sidelined international outsiders. The cooking oil and petrol transfers absorb one-fifth of spending, and the government wants to use the proceeds for infrastructure after passing landmark land access and power and transport sector changes while better targeting help for the poorest. Inflation may double to 7 percent with the shift, on a more modest 6 percent economic growth forecast. Wage demands have risen in advance with sporadic labor unrest, and President Yudhoyono in the final stages of his second term has publically endorsed their cause. Consumption may flag under these conditions as the current account heads toward a deficit and the capital account inflows pause from their recent record pace. Commodity export prices are off with the country a net petroleum importer and relying on heavy equipment purchase abroad. Foreign holdings of local debt may dip below their post-crisis 30 percent share as the central bank continues to purchase large amounts for system stability and liquidity management purposes. An external sovereign bond was easily placed in January, and private direct and portfolio investors are asked to provide one-quarter the estimated 2 trillion rupiah funding envelope for electricity, port, and road projects through 2015. A March review by rater S&P points out that energy tariffs are “low, inflexible and non-transparent.” The PLN monopoly unilaterally renegotiated contracts, which as a whole are poorly enforced according to the World Bank’s Doing Business measure. The new land acquisition statute is designed to slash costs and timing, and infrastructure guarantee and public-private partnership mechanisms have been upgraded.

Domestic state banks remain the dominant long-term money source, and the burgeoning Islamic sukuk market is well suited for risk-sharing as an alternative. The agency predicts FDI in these critical sectors could double as a share of GDP to 4 percent with “efficient administration,” but notes that lasting confidence will entail a series of policy and practical steps. The neighboring Philippines under President Aquino likewise unveiled a PPP push as the fiscal gap continues to come in under 3 percent of GDP. It has signed on to the US government’s Partnership for Growth aid effort which emphasizes power supply revamp, and exchange-listed privatizations are foreseen in the mix. Overseas worker remittances are intact as anti-corruption moves try to break from the past and prove their firmness.