Category Archives: Indonesia

Effects of Corruption in Asian States

The power of the state to influence operations and success of businesses is accepted in virtually all policy circles, though traditionally this focus centers on regulatory and tax regimes. Less obvious is the hidden intersection of governance and markets which distorts and subverts both. In Asia, the rapid evolution of markets in many countries over the last century has made government interactions with those markets more uncertain: the lack of durable institutions and legal traditions in the area has created a series of more ad hoc relationships. Corruption and rent-seeking behaviors by bureaucrats is somewhat inevitable in this climate.

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Development is an uphill battle

Foreign investors have been cutting exposure to rupiah bonds and stocks for weeks, suspending a long spell of bullishness based on Indonesia’s high yields, strong growth and its swift ascension into the investment grade club.

Fund managers have been distancing themselves from the rupiah market too, moving to neutral or even underweight positioning.

So when the same set of investors lapped up a $2.5-billion global dollar bond issued by Indonesia late in April, it was clear that their doubts and unease lay not with the fundamental attractiveness of Southeast Asia’s largest economy, but rather with assets denominated in the local currency, the rupiah.

“This year won’t be the year for Indonesia,” said Arnout van Rijn, chief Asia-Pacific investment officer for Robeco.

Foreigners hold about a third of local bonds, which exposes the $84-billion market to a brutal sell-off should the global risk environment change. And the burden of servicing foreign creditors is burning a hole in Indonesia’s external account, which is already hurting from slowing exports.

via Investors like Indonesia, but … | BusinessWorld Online Edition.

 

Monetary policy must be extremely hard to manage in a relatively small nation faced by currency speculation and other external pressures. Indonesia is at something of an intersection point for such concerns, as even in an otherwise positive business climate, currency pressures make international investors uneasy.

It’s easy in the United States to wave a hand and ascribe currency fluctuations as meeting whatever inflation target we’re currently identifying, or the largely tangential movements of other nations money.  But smaller nations have only limited foreign reserves, making government intervention to stabilize their currency less practical.

This problem often makes development operate in fits and starts, if not even more abortively. Indonesia is in the unfortunate position of doing most things right, and still losing.