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A Whiff Of New Money


Indonesia is a society on edge. Security guards brandish automatic weapons in front of all the Jakarta business hotels, poised to ward off potential terrorist attacks. Or check out the headlines: Gas and power shortages have surfaced in East Java because cash-strapped state oil giant Pertamina can't afford to import enough fuel, and the nation's vast energy assets have been terribly managed. In rural Aceh Province, home to a violent separatist movement, life is a struggle in the wake of the tsunami last December that killed 128,000 Indonesians and left 500,000 homeless.

Yet behind these grim realities, you sense something more in this sprawling archipelago: the scent of money. The Jakarta composite index has risen 65% over the past year, and the economy is growing at its fastest clip since 1996, up a surprising 6.4% year-on-year in the first quarter. Foreign direct investment commitments, which had collapsed after the fall of Suharto in 1998, have nearly doubled, to $5.5 billion, in the first four months of the year, vs. the same period in 2004. A consumer spending revival, coupled with robust global demand for palm oil, coal, tin, and apparel, is fueling growth. "Whoever puts their foot in here is going to make money over the next three to five years," says Henk Mahendra, Jakarta-based president director of Orient Technology Indonesia, which on May 30 signed a $250 million government contract to build and operate a new international port in Sumatra.

The new optimism and robust economic numbers owe much to the election of President Susilo Bambang Yudhoyono. The retired-general-turned-political-reformer, who earned a PhD in economics last year at the age of 55, took power in October. He beat weakened incumbent Megawati Sukarnoputri in the first direct general election in the nation's history. Yudhoyono has won international praise for his response to the tsunami and his blunt talk about the country's problems, including terrorism and human rights abuses by the military. But what really has the markets smoking is a five-year, $145 billion spending plan he unveiled in January to upgrade Indonesia's creaky infrastructure -- everything from a $178 million airport extension in Jakarta to a $1.5 billion gas pipeline. Cash-strapped Indonesia can ill afford such a massive public spending program, but Yudhoyono says foreign investors will contribute at least $90 billion, then lease the facilities out to cover the costs and make a profit.

Yudhoyono has also made ending Indonesia's endemic graft a personal crusade. The country has been ranked the most corrupt in Asia for four years running, according to Hong Kong-based Political & Economic Risk Consultancy Ltd. That touches a raw nerve with voters. In an interview with BusinessWeek, Yudhoyono said he received 5,000-plus complaints about corruption and red tape when in mid-June he invited Indonesians to call him on his personal mobile-phone number, which he made public. His phone soon crashed, but he got the message: If Indonesia doesn't clean up its act, "we will lose the battle to attract foreign capital and stimulate our domestic economy," he said.

Admittedly, Indonesia enters that battle with some serious handicaps. The nation has been hit by two major al Qaeda-inspired bombings since 2002. And red tape has made Indonesia an expensive, frustrating place to do business despite its large labor force and wages of roughly $80 per month for factory jobs. Its port-handling fees are the highest in Southeast Asia. And foreign businesses must wait about five months to get a license to operate in Indonesia, vs. one month in Thailand and Malaysia, according to the World Bank.

Yudhoyono is committed to changing all that during his five-year term. State money is already wending its way through the economy, as the government has signed off on the first of some $22 billion in infrastructure deals it is expected to approve in 2005. Yudhoyono is promising to deliver 6.6% annual growth -- about what Indonesia needs in order to create jobs for the 2.5 million young people who enter the labor force every year. Otherwise, he may not meet his goals of reducing the jobless rate from 9.5% to 5.1% and pulling half of the 38 million poorest Indonesians above the poverty line.

Some Indonesia-watchers say Yudhoyono may have a tough time meeting those targets. Morgan Stanley (MWD) economist Daniel Lian is forecasting growth of just 5.4% this year, with government investment accounting for four-fifths of that. It will take a steady flow of foreign investment into all sectors of the economy to give Indonesia the "structural lift" it needs, Lian figures.

The good news is that Indonesia has jumped onto the foreign investment radar screen. Yudhoyono has met with investors to promote the country and has pressed the bureaucracy to speed up license approvals. That has paid off in deals. Malaysia's Maxis Communications ponied up $100 million for Lippo Telecom in February, while Hong Kong's Hutchison Telecom (HUWHY) spent $120 million for mobile carrier Cyber Access Communications in March. That same month, Philip Morris International Inc. agreed to a $5.2 billion takeover of Indonesia's No. 3 cigarette maker, Hanjaya Mandala Sampoerna.

BARELY MAKING ENDS MEET

Yet keeping that kind of momentum going forward will be hard. Yudhoyono enjoys political popularity, but his legislative clout is limited. His coalition controls less than half of the Parliament, and few in the opposition like Yudhoyono's strategy of kick-starting the economy with big-ticket infrastructure projects when government money is tight and many ordinary Indonesians are barely making ends meet. "The quality of the growth is the big question," says Rama Pratama, a Parliament member from the opposition Islamic Justice & Prosperity Party. And if the economy doesn't grow fast enough to improve the lives of ordinary Indonesians, Yudhoyono's halo might start to tarnish. "I am afraid people's patience will end, and then we will have trouble," says former President Abdurrahman Wahid, a longtime rival of Yudhoyono.

At the same time, another big terrorist attack could unwind the precious economic gains -- a possibility Yudhoyono is keenly aware of. "We are fighting by conducting massive intelligence and police operations to find the terrorist cells," he says, though he concedes that the threat of an attack is "very real." Given everything the country has been through in recent years and the challenges it faces ahead, plenty of Indonesians are desperately hoping Yudhoyono can bring them a run of prosperity and stability -- and perhaps even let the security guards relax their white-knuckled grip on those rifles.

By Brian Bremner and Assif Shameen in Jakarta


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