The week in review: Geared up for more shocks

The Jakarta Post | Editorial | Sun, December 01 2013, 11:15 AM

President Susilo Bambang Yudhoyono strengthened the message of caution conveyed last week by Bank Indonesia’s (BI) Governor Agus Martowardojo that Indonesia should brace for possible shocks in the financial market, as the US Federal Reserve could start tapering its stimulus early next year.

This will mean that the supply of cheap dollar-based loans could dry out soon, pushing up lending rates. The Fed’s US$85 billion bond buying per month, or quantitative easing, has made dollar-based loans so cheap that many companies in Asia, including Indonesia, have been ramping up their borrowing in dollars.

The President’s warning at the conference of business leaders here on Wednesday that the government should prepare a contingency plan was not exaggerated.

 Just look at the great shocks on the financial and equity markets in Indonesia and other emerging markets between July and September after the Fed merely hinted in May that tapering was forthcoming. 

Tens of billions of dollars in portfolio investment flew out of Indonesia, pushing down sharply the rupiah exchange rate and share prices on the back of expectations that the tapering policy would make dollar interest rates rise significantly.

It is difficult to imagine the magnitude of the shock on the Indonesian financial market when the fiscal stimulus ended sometime in the first half of the year, but the rupiah could be in for another great shock.                                                            

The Jakarta Composite Index (JCI) dropped almost 6 percent this month and the rupiah hit another low in four years, depreciating further to around Rp 11,815 per US dollar.

According to the Jakarta Interbank Spot Dollar Rate (JISDOR), the rupiah has so far depreciated by 18 percent year-to-date and is now among Asia’s worst-performing currencies.

Finance Minister Chatib Basri stated he had already prepared several policy measures to stabilize the economy and reduce the current account deficit, which he estimated to reach $31-$32 billion throughout this year, higher compared to the $21.5 billion in 2012. 

The measures include increases in import tax on consumer and luxury goods, combined by a fiscal incentives package for companies that do not repatriate their earnings overseas and for firms that don’t lay off their workers. 

Agus said the central bank was now intensifying a campaign to bring home overseas funds to boost dollar liquidity onshore, so that the rupiah could be cushioned better against external shocks. BI also again raised its benchmark interest rate to 7.5 percent two weeks ago.

The news from global trade negotiations within the General Council of the World Trade Organization (WTO) in Geneva is not good either, as negotiators from 159 member countries failed early this week to clinch global free trade deals for approval by the WTO’s 9th ministerial meeting in Bali early next week.

Achieving a deal in Bali is seen as a final effort to revive a broader 12-year effort to ease global trade rules. The mini-deal discussed in Geneva had been intended, in part, to reduce delays and inefficiencies at national borders. 

Making it easier to move goods across borders could boost the global economy by nearly $1 trillion a year and support 21 million jobs, according to a report co-written by Jeffrey Schott, a senior fellow in international trade at the Peterson Institute for International Economics.

Some developing countries are demanding economic and technical assistance before they sign on. India is holding up a deal by insisting on protections for its farmers.

Negotiations toward a broader global trade deal began in Qatar in 2001 but the agonizing pace of talks has frustrated negotiators.

Success in the Bali meeting has been expected to return confidence to members in the multilateral trading system in general amid proliferation of regional and plurilateral trade accords, and in the negotiating function of the WTO in particular. But the expected deals on three packages — trade facilitation, agriculture and least developed countries — seemed more elusive. 

The divergence in the proposal in agriculture issues would serve as a solid foundation for progress in the talks on trade facilitation, which deals with simplified custom procedures, another hot topic of debate among developed and developing nations, Trade Ministry director general for international trade cooperation Iman Pambagyo said.

This is like a mutual hostage relationship between the G33 proposal and the trade facilitation draft deal. The progress in one area will generate a snowball effect in another area, he added.

The move by thousands of doctors across the country to stage a nationwide protest on Wednesday to show solidarity with three doctors — Dewa Ayu Sasiary Prawani, Hendry Simanjuntak and Hendy Siagian — who were put behind bars as a result of a Supreme Court ruling, raised more criticism than sympathy.

 The three were deemed responsible for the death of Julia Fransiska Makatey in 2010 due to a heart embolism during a caesarean section at Kandou Hospital in Manado.

Many blasted the doctors for violating their code of ethics as the strike and protests left many hospital patients without proper medical attention. A patient in South Sulawesi even claimed to have suffered a miscarriage without any medical assistance.

Orangutans and the prosperity approach on palm oil

Vincent Lingga, The Jakarta Post, Medan | Opinion | Mon, November 18 2013, 10:19 AM

Palm oil was on the minds of more than 600 delegates from multinational companies, conservation NGOs as well as smallholder representatives from some 30 countries who gathered in the Roundtable on Sustainable Palm oil (RSPO) conference here last week.

For good reason. In Indonesia, the industry is booming with annual production of over 27 million tons, netting more than US$20 billion in export earnings and creating badly needed employment and opportunities for farmers across the country, notably in Sumatra, Kalimantan and Sulawesi.

Financial returns for larger investors have also been outstanding, making the owners of the large palm oil groups among the richest businesspeople in the country, and seem likely to remain buoyant as demand grows.

However, Trade Vice Minister Bayu Krishnamurti seemed irritated by the seemingly perpetual accusations of many international NGOs, which tended to link the palm oil industry’s expansion in Indonesia with deforestation and the destruction of biodiversity, wildlife.

“It is in our best interests that we implement best practices for sustainable palm oil. It is for the sake of our future, not because others told us, to do it,” Krishnamurti told the opening of the RSPO 11th annual meeting on Tuesday.

Richard Whitehead, the editor of the FoodNavigator Asia newsletter, also acknowledged the palm oil controversy in the developed countries, especially Europe and the United States, set off by a seemingly endless series of bad headline stories.

Unfortunately, these headline stories more than often hide the complex issues behind the rapid development of oil palm plantations and make meaningful, sensible debates difficult.

Adam Harrison, a policy officer with conservation organization the World Wildlife Fund (WWF) recognized that oil palm plantations had produced 65 percent of the world’s traded vegetable oils, and that palm oil was a key ingredient in many foods, cosmetics, soaps, detergents and biofuel.

RSPO Secretary General Darrel Webber also acknowledges that oil palms have particularly high yields, providing almost 40 percent of global vegetable oil production while only occupying 7 percent of the total oil seeds’ agricultural lands.

According to the United Nations Food and Agriculture Organization (FAO), global vegetable oil production in 2012 totaled 144 million tons, of which 50 million tons was palm oil, 36 million tons soybean oil, both accounting for 60 percent.

The remainder consisted of rapeseed, peanut and corn and sunflower oils.

But typical of an NGO activist, Harrison also was apprehensive that the rising demand would increase the pressures on tropical forests and biodiversity, risking dangerous levels of carbon emissions from tropical peats and increased community conflicts.

Hence, according to Webber and Harrison, the best solution to address the negative externalities of palm oil cultivation is to ensure that products that contain palm oil meet the sustainability criteria, notably best farm practices, as defined by the multi-stakeholder organization RSPO.

The problem, though, is that the several of the principles and criteria applied by RSPO and the Indonesian Sustainable Palm Oil (ISPO) are different in their priorities, especially with regard to issues on environments, wildlife and biodiversity conservation.

Environmental NGOs, which seem to be the most assertive among the RSPO stakeholders, put biodiversity, wildlife and other high-conservation values, virtually on top of the list of their concerns.

These concerns certainly mean little to farmers in Sumatra and Kalimantan who earn less than $2 a day. Their priority is to put food on their tables and send their children to school. They cannot understand as to why conservationists in Europe claim the rain forests around them to be part of the world heritage of biodiversity.

To conservationists in the UK or the US, the loss of orangutans somewhere in the Sumatra jungles might be the end of the world. But to the poor farmers living near those jungles, such a loss does not matter much.

But the inability of the Indonesian government to enforce its own rules, the pervasive corruption within the bureaucracy and greedy businesses, often validate NGOs critics.

Despite these shortcomings, Krishnamurti still considers the perpetual wave of criticism of oil palm development ridiculous as the detractors’ bone of contention could easily shift from deforestation, to peatland destruction, the loss of biodiversity and high-conservation value areas.

So disproportionate was the wave of criticisms that many within the government and business world suspect the negative campaign was sponsored by producers of soybean, rapeseed, corn and sunflower oils, who see oil palm as a threat to their hegemony.

Such suspicion is simply understandable because, as Krishnamurti noted, oil palm is nine times more productive than all other vegetable oils.

In this context, the joint study currently being conducted by an independent certifying agency to clarify the disparities as well as to identify the synergies between RSPO and ISPO, could be the first major step to improving communications and understanding between the government and international NGOs as well as other private sector stakeholders.

Focusing on potential damages to the environment and other high-conservation value areas, as most international NGOs have done, is neither the right nor effective way to convey the message.

A disproportional adversary approach would only irritate policymakers and law enforcers in Indonesia because oil palm development involves complex issues of poverty, unemployment and inadequate institutional capacity of regional administrations.

International NGOs should not expect everything to be settled in one night, because such irrational expectations would not help build confidence in the vital importance of sustainable palm oil.

The best way to address the complex issues of sustainable palm oil is to implement an integrated prosperity approach to empower poor people living around primary forests to improve their living standards through best farm practices.

If international NGOs and multinational companies are really concerned about environmental degradation they should focus their energy on capacity building programs to enable regional administrations to better enforce laws and regulations and to empower local NGOs and other civil-society organizations to monitor and oversee the environmental impact of oil palm development by big companies.

______________

A disproportional adversary approach would only irritate policymakers and law enforcers in Indonesia.

______________________

The writer is a senior editor of The Jakarta Post.

The RSPO engine for sustainable palm oil seems to be sputtering 

Vincent Lingga, The Jakarta Post, Jakarta | Opinion | Mon, November 11 2013, 8:47 AM

More than 600 delegates from 30 countries are gathering in the Roundtable on Sustainable Palm Oil (RSPO) 11th annual conference opening in Medan, North Sumatra, today when the multi-stakeholder organization itself is facing bigger challenges to its own sustainability as the market watchdog of socially and environmentally sustainable palm oil.

Even though most big palm oil companies in Malaysia and Indonesia, which together account for over 85 percent of global production, and most consumer product giants, such as Nestle, Unilever and major environmental NGOs remain RSPO members, its effectiveness as the vanguard of sustainable palm oil is increasingly under scrutiny.

The establishment of the RSPO in 2004 by plantation companies, processors, manufacturers of consumer products, retailers, banks and environmental conservation NGOs was prompted largely by market forces or the mounting consumer demand for green products.

However, more than five years after the RSPO began its certification program, the volume of RSPO certified palm oil remains very small, amounting to only 8.3 million tons or 15 percent of global output.

Yet even more disappointing, both the market uptake of certified palm oil and the premium price gained by this supposed ‘green’ commodity are also negligibly small.

In fact since several RSPO members were implicated in the June-July forest fires in Riau, which caused the worst haze that Malaysia and Singapore had ever faced. This organization has been criticized for what several NGOs see as weak enforcement of its principles of sustainability.

The Indonesian government countered the RSPO with its own program called the Indonesia Sustainable Palm Oil (ISPO) in 2011 and Malaysia is also reportedly preparing its own sustainability initiative called the MSPO. 

Even though the credibility of both programs are questionable due to the non-involvement of NGOs and independent auditors, the ISPO certification has been made compulsory for all companies.

The principles of sustainable management promoted and assessed by the RSPO for its certification process includes elements, such as transparency, legal and regulatory compliance, best production practices, environmental responsibility, commitments to local community development, human rights as well as land rights to name a few. 

By and large, these principles and criteria are precisely the best practices for agricultural development that the ISPO itself has been trying to promote. 

The good news is that earlier this month, the RSPO and ISPO signed an agreement on strategic cooperation to eventually develop a unified certification program for sustainable palm oil.

At present, companies in Indonesia deal with two different certification programs: RSPO certification, which is voluntary but recognized by the consumers in the developed countries, and ISPO certification, which is mandatory but lacks international credibility due to the absence of environmental NGOs and independent auditors as well as weak law enforcement. 

But it will probably take a long time before the RSPO and ISPO can finally develop a unified certification plan, which will be globally recognized, especially if the Indonesian government is not willing to involve environmental NGOs and other private-sector stakeholders, such as consumer products and retail giants. 

But without government involvement in or co-ownership of its certification program, the RSPO would find it extremely difficult to influence policies in Indonesia and Malaysia.

In fact, the RSPO has been perceived in many quarters in both countries mainly as a forum of multinational buyers and international NGOs despite the active participation of smallholders.

Despite these differences, it is nevertheless totally misguided to say that the green campaign for agricultural commodities will weaken. On the contrary, the clock of the global green-consumer drive has been ticking faster and can no longer be turned back. 

The force of the gren consumer drive has also been quite strong within the 21-member Asia Pacific Economic Cooperation, which held its annual summit in Bali last month.

APEC has drawn a list of 54 Environmental Goods that are eligigible for deep import tariff cuts as low as five percent.

Indonesia, as the host of the summit, lobbied hard to enter palm oil and rubber to the list, but failed miserably. 

The rationale for the green campaign for agricultural commodities is this: because the prominent role of agriculture in the use of natural resources — notably land, water and biodiversity — ensuring sustainable resource use has become an important challenge.

The allegations that the RSPO movement is a subterfuge by the producers of vegetable oils, such as soybean, sunflower, rapeseed and corn oil in the rich countries in coping with the fierce competition from palm oil seem misplaced.

Independent product certification has earlier been used in the forestry industry as a market-based instrument to supplement the regulatory system in curbing illegal logging.

The Bonn-based Forest Stewardship Council (FSC), which groups the representatives from environmental and conservation groups, timber industry, forestry professions, forest certification organizations and forestry communities, has developed forest certification standards and accredits independent certifiers.

The Indonesian government has launched an official timber legality certification program, called SVLK, and has made this program compulsory for all forestry products under an agreement with the European Union. 

The green consumer campaign for socially, environmentally and economically sustainable farm commodities has escalated around the world and covered other agricultural commodities, such as soybeans and sugar cane. 

Soybean growers and processors in North and South America and Australia, grouped in the Roundtable on Responsible Soy Association (RTRS), and sugarcane growers and processors under their Bonsucro organization, have also begun similar certification programs.

Industrial users in Europe, which consume more than six million tons of palm oil a year, have committed to using only RSPO certified palm oil by 2015.

The Singapore-based International Rubber Study Group (IRSG) has embarked on an ambitious initiative to draw up a plan for the industry, much like what the RSPO has been doing in palm oil.

IRSG said recently all stakeholders of the rubber supply-chain system should come up with a sustainability plan, especially because over 85 percent of rubber production comes from small growers. 

The campaign for sustainable agricultural commodities, especially palm oil, still has still a long way to go, especially because India and China, the world’s largest palm oil consumers, have yet to realize the urgency of this green consumer agenda.

But as the experiences of several the RSPO members who have certified their plantations have shown, the primary beneficiaries of sustainable oil palm development are the growers themselves.

Several RSPO certified palm oil companies have showcased that their best agricultural and corporate governance practices immediately generated benefits like higher efficiency, higher productivity, peaceful labor relations, good relations with local communities, better pest management and certainly better reputations (corporate image).

The biggest challenge now is how to integrate the RSPO, ISPO and the imminent MSPO and put the sustainability agenda under government leadership, while also including the involvement of private-sector stakeholders.

Because a global platform, even if it is led by multinational companies or NGOs, cannot be seen as dictating or influencing the policies of sovereign countries. 

The writer is a senior editor of The Jakarta Post

View Point: Now we reap
what we sowed

Vincent Lingga, The Jakarta Post, Jakarta | Opinion | Sun, November 10 2013, 12:27 PM

The global economic slump certainly played its part in Indonesia’s growth falling to 5.6 percent in the third quarter, the lowest in the past four years.

However, we should blame ourselves for most of the strong headwinds currently hitting our economy. We are in fact reaping what we sowed during the rosy period of robust growth of more than 6 percent annually over the last three years.

Instead of riding on the strong momentum created by the gushing of cheap capital inflows from the US quantitative easing program and booming commodity markets between 2010 and the first half of this year, our policymakers and many politicians were lulled into hubris.

This complacency bred a series of distortive policies in mining and banking, protectionist measures in the trading sector and reawakened xenophobic sentiments amid the increasingly pervasive corruption in such key sectors as the law enforcement agencies and the strategic oil and gas industry.

These distortive policies, combined with the acute infrastructure deficit as well as the inefficient and corrupt bureaucracy already inherent within our economy, caused our economic engine to overheat easily even at an annual speed of just 6 percent, as we have experienced over the past three years, whereas, our potential growth is between 7 and 8 percent.

This is really quite unfortunate because based on our national incremental capital output ratio (ICOR); we need at least 7 percent growth to absorb the estimated 2.5 million new job seekers entering the labor market every year.

The ballooning current-account deficit, which set off a sudden reverse of capital flows between June and September, was caused largely by the widening trade deficit, which in turn was brought about by declining exports due to the global economic slowdown and rising imports.

Our imports increased sharply over the past three years to fulfill the rapidly expanding domestic market demand for consumer goods, basic materials and capital goods for new investment ventures.

The import of consumer products and industrial inputs should not have increased so sharply had our manufacturing industries built up adequate capacity and had our factories not depended so heavily on imported basic materials.

But again the slow development of the manufacturing capacity should be blamed on high logistics costs, which are in turn caused by the big infrastructure deficit, making our supply-chain management grossly inefficient.

Therefore, we can see how the acute lack of sense of urgency on the part of the government to develop infrastructure and reduce bureaucratic and regulatory barriers has created a vicious circle and made our economic engine prone to overheating.

When the US Federal Reserve hinted in May that it would begin to cut (tapering) its massive quantitative easing program, which pumps US$85 billion a month mainly into the global market, Indonesia therefore became the most vulnerable to capital outflows, compared to its Southeast Asian neighbors.

It was the overheating that forced Bank Indonesia (BI), the central bank, to put the brakes on growth, tightening its money policy by raising its benchmark interest rate.

We may console ourselves by considering the slower growth as a timely reality check to cool down the economic engine, thereby reducing imports and curbing trade and current-account deficit.

The government may be right in reiterating the importance of slowing down the pace of growth and focusing on economic stability, seeing an expansion of less than 6 percent as a new path of sustainable growth.

After all, an optimistic growth-rate estimate of 5.8 for this year, compared to the International Monetary Fund projection of 5.3 percent and World Bank’s 5.6 percent, would still be respectable and could be among the highest in the region, except for China and some other much smaller economies in the region.

The fact is that our economic growth could have been higher had we have been determined to do our homework, accelerating, instead of reversing, the pace of reforms to improve the overall efficiency and competitiveness of the economy.

The gross inefficiency of our economy, combined with the international perception of rampant corruption within our system, made Indonesia the hardest hit during the recent reverse of capital flows, making the rupiah one of worst performing currencies in Asia and the Jakarta stock price index suffer a sharp fall.

We should not overdo our concern over the slowdown, especially if we look into the long-term potentials of the economy.

But domestic consumption and capital expenditure, which have underpinned growth, are still expected to further slow in the coming months as households and companies feel the effects of higher borrowing costs.

The government needs to accelerate the pace of its bureaucratic and regulatory reforms to remove the “fats” that makes the economy grossly inefficient and susceptible to overheating.

But successful reforms require strong leadership and a sense of urgency when things are not as quiet and smooth as they appear. The Fed’s tapering policy still lingers on, threatening another wave of capital outflows.

We already experienced the extreme volatility in our financial and equity markets amid the mere hint of a reduction in Fed bond-buying last May.

The best way to brace ourselves for economic turbulence is by speeding up the pace of our bureaucratic and economic reforms.

Considering the elections next year, we are afraid that reforms will likely be the last thing on the minds of most politicians as the country’s economic management has been set on automatic pilot.

The writer is senior editor at The Jakarta Post.

View Point: Employers,
workers need balancing
act in new minimum wages 

Vincent Lingga, The Jakarta Post, Jakarta | Opinion | Sun, September 15 2013, 2:41 PM

The minimum wage in Indonesia has remained one of the most controversial policies in both public discourse and labor economics even though the policy is needed to protect the interests of workers whose bargaining position is weak, especially as unemployment and under-employment are very high.

Employers want profits, trade unions want a better life for workers and the government wants to maintain a conducive climate for investment. These objectives are interdependent as businesses are only sustainable when they remain reasonably profitable.

Industrial peace can only be maintained if companies take good care of their workers. The government also has an important role to play in maintaining industrial peace and in ensuring fairness through a mixture of persuasion and legislation. Tripartism involving employers, workers and the government, therefore, has been pursued as the fairest mechanism to make labor policies.

 The recent instruction by President Susilo Bambang Yudhoyono, which caps the increase in the provincial minimum wages next year at 5 percent on top of inflation for labor-intensive industries and 10 percent for other industries, has brought the wage issue to the fore, again.

The government considered a strong framework, such as this, necessary to establish certainty for negotiating new minimum wages next year. Employers seem to be comfortable with the new corridors for minimum wage negotiations, especially because they are now facing much higher credit interest rates caused by Bank Indonesia’s (BI) money tightening to defend the rupiah and fight inflation.

Worse still, since most labor-intensive manufacturing companies as those in the production of textiles and garments, shoes and toys, electronics and electric appliances depend largely on imports, intermediate materials and parts and components, the steep fall in the rupiah against the American dollar last month, consequently increased their production costs.

On the other plane of the tripartite forum, workers have seen their purchasing power deeply eroded by inflation, which, according to the central bank’s forecast, could reach 9.5 percent this year.

Several union leaders have, therefore, demanded that the minimum wage rises by as much as 50 percent. An increase that, most labor-intensive businesses argue, could cause many companies to close their plants.

But too high an increase would more likely impact employment dynamics and reduce net job growth.

A recent study by the Centre for Strategic International Studies (CSIS) concluded that the average minimum wage in Indonesia increased by 30 percent between 2010 and 2013, compared to 14.20 percent in Thailand; 8.4 percent in China; 6.7 percent in Vietnam; 5.2 percent in Cambodia; 3.3 percent in Malaysia; and 3.1 percent in the Philippines.

If the minimum wage (now $200 monthly in Jakarta) continues to rise steeply, many labor-intensive industries would price themselves out of the international market.

Even more damaging is that new investment will tend to focus on capital-intensive industries.

CK Song, chairman of the Korean Chamber of Commerce and Industry in Indonesia, revealed at a labor conference last week that over the past few years Korean firms had laid off 78,000 workers due to the unreasonably high rises in minimum wages.

There is nothing wrong with rising wages as long as they are justified by higher productivity because, in the long run, increases in wages that are not supported by a corresponding rise in productivity will lead to higher unemployment as factories reduce payrolls or investors shun labor-intensive industries.

The dilemma seems to be that there has never been any correlation between a rise in wages and the level of productivity because trade unions claim that the minimum wages across the country have always been way below the basic costs of decent living.

It is understandable that to some extent the unions sometimes doubt the effectiveness of social, tripartite dialogue due to their perceived unequal position in facing the government and employers in collective bargaining.

As such it is no wonder that trade unions have of late tended to resort to strikes and street demonstrations, as thousands of workers did in Jakarta and several other cities last week, to push their wage demands.

The problem, however, is that wage increases are not sustainable if revenues do not rise either by the higher productivity of human capital and more efficient physical infrastructure or larger market sales.

We should also remember there are still around eight million unemployed and more than 35 million underemployed.

 Moreover, more than 70 percent of our 120 million labor force remains trapped in the informal sector, meaning they do not get any benefit from labor regulations and the minimum wages.

Our concern is that the tripartite wage councils would eventually lose its credibility if workers too often got their demand fulfilled through strikes or demonstrations, rather than through meaningful negotiations under the councils.

The three parties represented in the councils should always share the basic principles that economic growth and job creation are common goals and they can only be achieved if there is industrial peace and if the gains from growth are fairly distributed. The economy will not grow if employers and unions are constantly at loggerheads with each other.

We fully support the workers’ demand that the mandatory minimum wages should meet at least the basic cost of living to sustain decent livelihood.

But we also understand the disadvantages encountered by our manufacturing companies as their logistics costs and local lending rates are much higher than those in other ASEAN countries.

The solution, therefore, needs a balancing act.

The writer is senior editor at The Jakarta Post

Commentary: Certainly not crisis in economic fundamentals but in confidence

Vincent Lingga, The Jakarta Post, Jakarta | Headlines | Thu, August 29 2013, 9:38 AM

Bank Indonesia (BI), like central banks in other major emerging economies, has been in a dilemma over the past weeks due to massive capital outflows, because in order to keep more money in the country and tame inflation, interest rates need to rise. 

But higher interest rates would make it harder for local companies to borrow, potentially causing a credit crunch and limiting economic growth.

What a strikingly different situation it is now compared to the period between 2010 and early this year, when Indonesia was still the darling of foreign direct and portfolio investors.

Indonesia had become the main destination of short-term portfolio capital from Europe and the United States, pushed out by their easy monetary policies. The huge capital inflows were pulled in by a robust economic outlook and high interest rate differential in Indonesia.

Even though it is widely recognized that the size and volatility of the flows created risks to financial stability through the build-up of financial imbalances, the liquidity management ran well as the government made the right policy responses to the capital inflows.

Structural reforms were implemented to improve the capacity of the economy to absorb the capital inflows and channel them into productive investment. The domestic bond and equity markets were deepened, and financial regulations and supervision were strengthened.

Put briefly, disciplined macroeconomic management, encompassing fiscal, monetary and exchange rate policies were able to well manage capital inflows and contain the buildup of excesses in specific sectors of the banking system.

But the eventual recovery in the US and the Federal Reserve signaling last May that it would soon tighten its money policy caused sudden stops and, finally, capital reversals. 

After rejoicing over the sharp rebound of capital inflows from 2010 to early this year and robust economic growth of around 6 percent, Indonesia suffered the brunt of a sudden reversal in flows, unleashing tremendous downward pressure on the rupiah and equity prices.

The cascading impact of the upcoming tighter money policy by the US Fed and the series of distortive economic and business policies made by narrow-minded politicians and mounting economic nationalism have prompted portfolio investors to offload their rupiah assets and turn to more secure dollar assets that promise higher returns.

Fortunately, though, the debacle has not escalated to panic, especially because the offloading of rupiah financial assets was part of a general sell-off of Asian shares and currencies, prompted by fears that the forthcoming US Fed money tightening would raise bond yields.

The Jakarta benchmark stock market index has thus far dropped by almost 20 percent from its all-time record in May and the rupiah lost almost 12 percent, going down to as low as that at the height of the global crisis in early 2009.

The big question now is why is it Indonesia has seemed to suffer the most severely, compared to other Southeast Asian countries? And why Indonesia’s long-term growth path seems to have taken such a negative turn just in the past few months?

The answer is that the good times lulled policymakers and many politicians into hubris, resulting in a series of distortive policies in various economic sectors and the bashing of foreign companies (investors) amid the increasingly pervasive corruption in such key sectors as the law enforcement agencies and oil and gas industry. 

Over the past year, the government has introduced distortive regulations in the petroleum and general mining and banking industries and erected more non-tariff barriers to imports of such vital commodities as food and livestock.

The regulation requiring investors in the mining sector to build smelters is good to generate higher added value. But the time schedule set for this rule is technically and commercially impossible in view of the huge additional investment needed to build smelters. 

Yet even more damaging is the rule that accelerates the compulsory divestment by foreign mining investors to national interests at a time when they are required to put up huge sums of additional investment.

Likewise, the central bank cut the maximum limit on the foreign ownership of a national bank to 40 percent from 90 percent without an adequate transition period, unnecessarily creating uncertainty for foreign investment in the capital-hungry banking industry. 

Consumers were hurt by steep increases in the prices of horticultural products and beef due to protectionist trade policies that did not bring any benefits to local producers.

In the meantime, while new investment in oil exploration and oil production has steadily declined, politicians at the legislature have stubbornly demanded drastic amendments to the 2001 Oil and Gas Law, which they perceive to be too strongly biased toward foreign interests.

Given the upcoming presidential and legislative elections next year, many are afraid that whatever amendments are made to the oil law will be too nationalistic. 

No wonder, business leaders taking part in the panel discussions at the Singapore Channel NewsAsia’s Business Insights Indonesia here on Wednesday saw the latest turmoil in the financial market as a strong wake-up call for the government to restore confidence through a faster pace of reform measures. 

As the London-based Economist weekly news magazine observed last week, “In good times, Indonesia might have been able to afford the luxury of such posturing. But those times, all of a sudden, are over. Now that profit margins are coming under pressure, many foreign investors will begin to look elsewhere, just at the moment when Indonesia might need them most.”

Commentary: Permissiveness
on big cash deals, holdings
spur malfeasance

Vincent Lingga, The Jakarta Post, Jakarta | Commentary | Thu, August 22 2013, 9:58 AM
What stuck in our throat after last week’s arrest of Rudi Rubiandini — who was then chief of the upstream oil regulatory body (SKKMigas) — was the easy way in which senior officials, and even a Cabinet minister, accepted the discovery of stashes of big sums of cash.

There seemed to be no outcry, nor surprise, about the concealment of hundreds of thousands of dollars in briefcases, bank deposit boxes and shopping bags. 

“The money could simply be operational funds,” noted Energy and Mineral Resources Minister Jero Wacik in reference to US$200,000 found stuffed inside a suitcase at the office of the ministry’s secretary-general, Wayono Karno. This spontaneous, almost off-hand, remark really insults the public intelligence. 

Jero, a prominent member of the ruling Democratic Party, seemed unsurprised by the booty unearthed during the unscheduled search by the Corruption Eradication Commission (KPK). The sweep at his ministry followed on the heels of Rubiandini’s arrest. 

Even in the face of $700,000 in bank notes found at his home Rubiandini strongly denied corruption.

“I didn’t commit any act of corruption. I only accepted gratifications,” said Rubiandini, a — formerly — highly respected professor at the prestigious Bandung Institute of Technology.

He showed no sense of remorse.

Two days after his arrest, KPK officials seized another $320,000, also in cash, from his deposit box at state-owned Bank Mandiri, as well as another $20,000 and S$60,000 and 180 grams of gold at a strong box in his office at SKKMigas.

A local executive from Singapore-registered Kernel Oil Ltd has also been implicated in the delivery of the huge sums of money; accordingly, it is of no surprise to learn that Kernel Oil also happened to have accounts at Bank Mandiri. 

We should uphold the principle of presumption of innocence until proven guilty. 

However, in whatever way we see or define it, the accumulation of such a huge amount of cash could have been motivated by some malicious intent to commit malfeasance — if not corruption, it could be tax evasion or money laundering. Whatever the case may be, they all breach the law.

Banks, and their ATMs, operate across this vast archipelago and technology has made electronic transactions quite easy and relatively safe, so, why squirrel away such a large amount of rupiahs — let alone foreign currencies?

Many huge, dubious, cash deals involving dirty money derived from unlawful practices have escaped the attention of the Financial Transaction Reports and Analysis Centre (PPATK), which is in charge of enforcing the 2002 Anti-Money Laundering Law.

Not for wont of trying though — the PPATK claims to have filed thousands of reports on suspicious financial transactions to the National Police, the Attorney General’s Office and the KPK, but very few ended up in courts.

Welcome to the land where big-cash transactions are still the norm rather than the exception and money laundering is the game in town.

Cash deals remain the preferred mode of transaction for corruptors and other big criminals because the absence of a paper trail ensures they stay off the radar of tax officials.

Even lawyers, those supposedly “well-versed” in the Anti-Money Laundering Law, consider it the norm for officials or police officers to live beyond their official means.

Look at how the high-calibre team of defense lawyers for former police Insp. Gen. Djoko Susilo, currently on trial over charges of corruption in the procurement of driving simulators, which cost the state millions of dollars in losses, shamelessly paraded more than half a dozen witnesses in front of the court in support of his innocence.

Subekti Hadianto, one of the witnesses, claimed Djoko invested Rp 200 million in his jewelry business, which until 2010 alone produced total profits of Rp 14.5 billion that he had handed over to Djoko. But when one of the judges asked Subekti to produce documents to support his claims, he said all the transactions had been done in cash without any documents.

Other witnesses claimed to have been engaged in property and credit deals with Djoko worth billions of rupiah, but again all the deals were made in cash without any documents.

Yet, the defense lawyers still gave them their day in the court last month to support Djoko’s claims that his huge assets were the result of legitimate businesses.

Large sums of dirty money can still easily be laundered because not all financial institutions, property developers or car dealers report transactions worth more than Rp 500 million to PPATK.

The central bank has imposed a “know-your-customer” code of conduct on banks to help detect transactions that do not fit with the profile of their clients, but keen competition for deposits or big customers often prompts banks and other companies to compromise on the code for fear of losing big customers.