June 1, 2012

A Postcard from the Asia Pacific

Indonesia: Reaping the benefits of prudent policies

Thanks to the far-sighted policies pursued by its rulers, Indonesia serves as a stellar example of growth in South-East Asia.

The Asian powerhouse of Indonesia, the largest economy in the southeast Asian region, seems to be a firm believer in the principle of saving up for a rainy day. Most countries with a growth rate of 6.5% would be content to rest on their laurels and enjoy the moments of glory. However, Indonesia decided to launch a $12-billion stabilization fund last year as a bulwark against volatility in the markets and to assist the government in buying up debt. Needless to say, the move proved to be a prudent one, as currently the country’s rupiah currency has fallen to its lowest level in more than two years.

Indonesia, it seems, has learned from its past lessons. With the Asian financial crisis of 1997-98 still fresh in its memory, the decision to set up the stabilization fund has been a blessing in disguise. Initiated by the Bank of Indonesia, originally the fund was primarily intended to be a protective shield for the country’s bond market, along the lines of Korea’s bond stabilization fund. Alerted by the fact that about 30% of the government bonds were owned by foreign capital, policy makers designed the fund to be a buffer just in case a dire economic situation prompted a pullout of foreign funds, which in turn would have led to a plunge in bond prices. To discourage hot money, the government also made it mandatory that the bonds be held for a minimum period of one month, according to a Financial Times report.

The fund, christened the Government Investment Unit, is ranked 33rd on a list of 57 sovereign wealth funds compiled by www.sovereignwealthfundsnews.com. The government attracted as many as 13 state-owned companies to partake in the fund, including Bank Mandiri, Bank Negara Indonesia, Bank Rakyat Indonesia, as well as a couple of non-banking institutions and insurance companies.

Encouragingly, Indonesia’s president of seven years, Susilo Bambang Yudhoyono, has been supporting a realistic and steady course for this southeast Asian nation. In a WSJ interview, the leader recently admitted that the slowdown in China is likely to have a direct impact on the region’s economy. And, sounding a cautionary note against the backdrop of the Euro-zone crisis, Yudhoyono cautioned that Asian leaders should refrain from even thinking about a common Asian currency. Alongside, Yudhoyono said he would initiate measures to curb the use of subsidized fuel, which is costing the nation more than $15 billion a year.

The president has also made efforts to curb corruption and rein in terrorism in this Muslim-dominated country. Recently, though, he had to bow down to fundamentalist groups to call off American pop singer Lady Gaga’s concert due to objectionable content.

Despite the slowdown in the region, Indonesia still remains the darling of investors with growth expected to be above 6% in 2012. Although the ratings agency Standard & Poor’s held the country’s sovereign credit rating below the investment grade, foreign direct investment (FDI) into the country jumped more than 30% year-on-year during the January to March period. Needless to say, the booming commodities sector pocketed a sizeable amount of the FDI that poured in during the first quarter. This commodities boom in the country, which helped create a bevy of billionaires, may not last forever, but strong domestic consumption could help Indonesia hold steady in the long run. And, with this southeast Asian archipelago embracing decisive and prudent steps on its growth journey, it just may turn out that even rainy days may turn sunny.

Image Credit: Mazzali on Flickr under a Creative Commons License