When the Secretary of State makes her stop in Jakarta on Feb. 18-19, she will see a country that has made big economic and political strides
A decade ago Indonesia was the sick man of Asia, its banks mired in bad debts, its foreign exchange reserves depleted, and its economy crippled by Asia's 1997-98 financial crisis. Many parts of the sprawling archipelago were convulsed by bloody separatist conflicts, while Jakarta struggled to overcome the legacy of strongman Suharto's 32-year rule that ended in 1998. But when Secretary of State Hillary Clinton makes her stop in Jakarta on Feb. 18 and 19, she will be visiting a country that boasts the region's most successful economic and political transformations.
Clinton's decision to include Indonesia in her first Asian trip on the job makes plenty of sense. Indonesia holds strong personal ties for her boss, who spent several years there as a child. It is also the world's largest Islamic country: 85% of its 235 million people are Muslims. Yet it is also one of the most moderate Muslim nations, and a visit there fits in with President Barack Obama's vow to reach out to followers of Islam in an attempt to rehabilitate America's image abroad. "This visit is a symbolic gesture, and perceptions can be as important as reality," says Jusuf Wanandi, vice-chairman of the Center for Strategic & International Studies in Jakarta. As "a moderate country," Indonesia "can show to the Muslim world and the world at large that being Muslim can be compatible with modernity and democracy and also economic growth with equity," says Wanandi, pointing out that 48 political parties will be participating in parliamentary elections in April.
Robust GDP Growth
While Indonesia was one of the worst-hit countries during the regional crisis of the late 1990s, it is poised to weather the current slowdown better than most, thanks in part to the relatively small role trade plays in its overall economy. Gross domestic product is forecast to grow 3.8% this year according to HSBC (HBC), which is a sharp slowdown from the 6.2% growth seen in 2008. Still, that looks pretty attractive compared with the expected performance of its neighbors: Singapore could contract 5%, South Korea 3.2%, Taiwan 3.6%, and Thailand 0.8%. Because exports have historically not been correlated with what happens in the U.S. economy, says Robert Prior-Wandesforth, Southeast Asian economist at HSBC, "the knock-on effect on the domestic economy will be relatively muted." He also points out that Indonesia's banks are in good shape, with the largest cushion of capital and the lowest loan-to-GDP ratios in the region.
That's not to say Indonesia won't be buffeted by what's happening beyond its shores. The country has been hit hard by the collapse in commodity prices, upon which the resource-rich country depends for most of its export revenues from sales of gold, copper, nickel, and aluminum. This reflects the country's limited success at diversifying beyond resource industries. Indonesia's light manufacturing industry has lost out to China in recent years, though a handful of foreign brands, including Mattel (MAT), Nike (NKE), and Adidas still export from there.
Most multinationals operating in Indonesia, however, are there to serve the domestic market. Philip Morris International (PM), for example, is the largest foreign investor, after paying $4.9 billion to buy local cigarette maker PT Hanjaya Mandala Sampoerna; the company opened a $220 million cigarette-rolling factory outside Jakarta last fall. Unilever continues to invest in both its ice cream and skin care brands in the country, too.
Weak commodity prices bode ill for the country's investments, though. Some of the world's biggest mining companies, including Freeport McMoRan (MMR), Newmont Mining (NEM), and Rio Tinto have concessions in Indonesia, but output at some mines has slumped, and money to develop new ones is scarce. The country's decision to decentralize power in recent years has granted greater autonomy to provinces over how their resources should be exploited, but it has also created so many new bureaucratic hurdles (and new opportunities for corruption) that foreign companies have found it impossible to move forward with new projects. There have been no new metal mining projects in 12 years. Although Parliament passed a new mining law last December, implementing regulations that will clarify procedures aren't likely to be released until after presidential elections in July.
Indeed, corruption remains one of the country's biggest stumbling blocks to development. "This is a rich country, poor in governance," says one researcher at a foreign investment bank who asked his name not be used. This is a sentiment shared by many in the government of President Bambang Yudhoyono, and in recent years the Corruption Eradication Commission has made progress in several high-profile cases, including a conviction of a former Central Bank governor in a bribery scandal. Such successes have helped Indonesia move up from 143rd to 126th place on Transparency International's list of most corrupt countries, with first place indicating the lowest level of corruption. "The judiciary is weak and corrupt, and corruption is still of course rampant," says Wanandi. "There is hope now that at least things have started in the right direction."