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JULY 28, 2000 VOL. 26 NO. 29 | SEARCH ASIAWEEK

So This is a Rally?
Amid a devastated economy, Jakarta shows few signs of life
By JOSE MANUEL TESORO Jakarta

Once-bankrupt Kia Motors has been riding the coattails of South Korea's economic recovery for months. But who would have predicted its strong performance in Indonesia? Since introducing a luxury passenger van called Carnival in February, Kia's Indonesia-authorized dealer has sold 1,000 units despite a basic price tag of over $27,000. "I myself am surprised," says Reza Muttaqien, senior sales executive. Especially since most buyers are paying cash. He figures that the rupiah's devaluation is benefiting at least the people who have earnings or holdings in U.S. dollars. "I'm pretty happy," he says. "The more political intrigues and the more the rupiah weakens, the more it makes us profitable."

That a Crisis-hit carmaker is thriving in Indonesia sums up a quirky economy: There is both more — and less — to the nation's recovery than meets the eye. Yes, some consumers are spending, but any return of confidence is shallow and spotty. GDP is indeed up, but a disastrous 1998 lowered the bar substantially for subsequent comparisons. And besides, foreign direct investment, bank lending and the value of the rupiah have all been abysmally low. Add it up and you come away feeling that Indonesia is a deeply troubled economy with the odd bright spot. But hold that thought. In the face of the nation's myriad long-term problems and challenges, even a little good news is a pleasant surprise.

In the first five months of this year, some 99,000 cars were sold, more than in all of 1999. Astra International, Indonesia's largest car maker, predicts its end-of-year sales will be up 150% over last year. In fact, car sales have been rising since last July, the month after the country's first free multi-party elections in over four decades. The peaceful and much-praised June 1999 polls apparently fueled consumer confidence, which in turn boosted the economy.

Sales of imported luxury cars have accelerated. A top-of-the-line Mercedes-Benz costs around $160,000 in Jakarta, while a Land Cruiser sells for about $100,000. Yet as of April, the number of luxury models legally entering the country surpassed 7,400 units, significantly up from the 904 imported in the same period last year. Becoming well-traveled seems to have followed on from being well-wheeled. This year, the number of Indonesians who have embarked on the Haj pilgrimage, after shrinking 65% between 1998 and 1999, is nearly back to pre-Crisis levels.

The Jakarta office of property consultancy Jones Lang LaSalle reports that retail leasing is now a landlord's market. On average, more than 90% of the space in Jakarta's shopping centers is occupied. In the city, construction cranes have stirred, and long-mothballed property developments are swarming with workers. According to the Central Statistics Bureau, private consumption accounts for close to three-quarters of GDP, up from two-thirds in 1997.

Where is the money coming from? Apparently not from foreign investors or lenders. Foreign direct investment approvals in Indonesia as of April 30 totaled about $1.9 billion, a tiny fraction of the $33.8 billion recorded in all of 1997. Overseas private lending to Indonesia has slowed dramatically since the Crisis. Last year, in a bid to generate domestic capital for business activity, the government issued interest-bearing recapitalization bonds to prime the banking system with funds. The idea was that a refreshed financial system would start lending to businesses, which in turn would generate the exports needed for a sustainable recovery. That has not happened. According to the central bank's latest figures, total credit at commercial banks last year amounted to about $24 billion, 40% lower than in 1997.

The only way the story makes sense, says David Fernandez, J.P. Morgan's Singapore-based head of economic research for emerging Asia, "is if people were sitting on enough wealth through all the Crisis." In other words, the collapse of the rupiah did not impoverish all Indonesians. For those with unencumbered pre-Crisis wealth or a continuing stream of earnings — from exports, overseas businesses or even corruption — the economic downturn was in many ways an opportunity.

Back in 1998, when the currency was crashing through the floor and riots were breaking out across the country, local banks entered a ruinous bidding war for depositors. Local institutions offered rates of over 50% a year for short-term time deposits. At the end of 1998, one-month time deposits alone stood at $21.2 billion, nearly 400% more than a year earlier. The rupiah's subsequent strengthening was a further boon to those who saved.

The growth in consumption partly reflects the release of demand pent up for the last two years. Indeed, political changes may have fueled new demand as well. "There are a lot of new players, both in politics and in business," says Andreas Bunanta, former loan work-out chief at the Indonesian Bank Restructuring Agency (IBRA). The explosion in luxury car sales and the uptick in pilgrimages may reflect the desire of newly-minted members of the elite to enjoy the fruits of their new status.

Indonesia's moneyed classes (new and old) can in large part thank the government. With banks bleeding, the state stepped in and issued $72 billion in bonds to recapitalize them. Those bonds increased government debt by three-quarters, to $134 billion. Jakarta also assured that depositors would get paid, and it used IBRA to assume many of the bad debts of local lenders. "This is actually quasi-capital so these local companies can go on doing business," points out a senior Indonesian executive. Indeed, in IBRA's rush to meet International Monetary Fund deadlines, there are criticisms that some debtors are being treated too leniently. Bimantara, a conglomerate owned by ex-president Suharto's second son, Bambang Trihatmodjo, got a 50% break on the interest owed for a $61.6 million loan.

Of course, not all new spending can be attributed to cash hoards or unpaid obligations. Yet most analysts of the Indonesian economy agree that a consumption rally alone can't sustain recovery. The central bank may have to raise interest rates to defend the weak rupiah. And global oil prices, which have been notoriously fickle in recent years, could easily fall again. (Some 42% of Indonesia's exports are raw-material- or oil-related.)

There are signs, too, that the spending has peaked. In April this year, the consumer confidence index tracked by economic tabloid Kontan dipped. That was the month President Abdurrahman Wahid sacked two ministers from his cabinet, ushering in the current period of political conflict and uncertainty. This emphasizes an important lesson: Consumers can't be counted on to energize a recovery in a country with as many political and economic problems as Indonesia has. Leadership is still key.

Additional reporting by Arif Mustolih Jakarta

Write to Asiaweek at mail@web.asiaweek.com

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