That 4% Gain Doesn’t Look So Bad After Madoff: William Pesek

Dec. 17 (Bloomberg) -- Indonesia has a scandal on its hands, and it involves gross domestic product.

That won’t sound too serious to observers worried about corruption or anti-pornography laws intensifying debates about Islam’s role in public. Yet what might best be described as the “4 percent crisis” is getting breathless press coverage.

That’s the dismal rate at which many expect the economy will grow next year. What, did someone say dismal? When you look around the world, it’s hard to think of a sizeable economy that might perform at even close to 4 percent.

“Indonesia is better-positioned to ride out this global crisis than many economies in Asia or, for that matter, anywhere,” says Sandiaga Uno, managing director at PT Saratoga Investama Sedaya, a private equity firm, in Jakarta.

Sound like a reach? The U.S., Japan and Europe are in deepening recessions. U.S. auto companies are collapsing, while the latest sentiment survey among Japan’s largest manufacturers fell the most in 34 years. China’s industrial production grew at the weakest pace in almost a decade in November.

Indonesia is fretting over 4 percent? It’s not the 10 percent-plus gains Bernard Madoff’s brokerage claimed to get for clients until his alleged Ponzi scheme collapsed. Yet in a world headed toward negative growth, Indonesia may be an intriguing outlier.

The caveat here is that this crisis doesn’t turn out to be another Great Depression. Resource-rich Indonesia would feel the pain of plunging demand for commodities. High poverty rates leave it vulnerable to slowing world growth.

America’s Woes

Things in the global economy are arguably more relative today than ever before. The trouble with telling an audience in Jakarta what Indonesia needs to do to right its economy is how quickly the focus shifts to America’s woes.

Say that Indonesia is too corrupt and you face the inevitable retort: “Uh, what about your country?” Raise the issue of weak transparency at companies and you’ll hear: “Yeah, just like at Lehman Brothers and Bernard Madoff’s shop?” Talk about financial systems, and folks point to how the U.S. is spending trillions of dollars to bail out its own.

Think about it. If you were an economist arriving on Earth from another planet and looked at the U.S.’s national balance sheet with objective eyes -- growth in the federal budget deficit, the sobriety of monetary policy, household savings -- you might conclude the U.S. isn’t wildly far from developing- nation status.

Unappreciated Strengths

Indonesia is decidedly in developing-nation territory, says Rakesh Bhatia, chief executive officer of HSBC’s Indonesian unit. Yet “the economy has some strengths that aren’t being appreciated,” he says.

The government has been anticipating the effects of the global crisis, says Anton Gunawan, chief economist at PT Bank Danamon Indonesia. While more needs to be done to stimulate growth, Southeast Asia’s biggest economy has considerable fiscal and monetary latitude to stabilize things, Gunawan says.

While it’s a work in progress, post-Asian crisis reforms reduced Indonesia’s vulnerability to chaos in markets. A decade ago, excessive short-term borrowing in foreign currencies left corporations and banks highly vulnerable. In 1997, Uno says, the ratio of short-term loans to foreign reserves was 175 percent. Today, it’s closer to 35 percent.

‘Good Enough’

The corporate sector is far less leveraged than in 1997, making it easier to meet debt payments. Jakarta’s property markets also didn’t rise into bubble territory as they did in other Asian capitals. And if one can find a silver lining in Indonesia’s low standard of living, it’s that consumer debt is modest compared with developed economies such as the U.S.

Indonesia’s government is more optimistic than analysts, expecting growth of between 4.5 percent and 5 percent. That’s even amid rising expectations that a global recession will sap demand for the nation’s exports.

“Growth down to 4 percent is still good enough for Indonesia,” says Gunawan.

There’s much to be done, of course. The number of Indonesians living below the poverty line is still more than President Susilo Bambang Yudhoyono’s target. Yudhoyono plans to reduce the number of extreme poor -- those surviving on less than $20 a month -- to 5.5 percent of the population, or about 17 million people, by 2009.

Worth the Hassle

With 243 million people, Indonesia is the world’s fourth most populous nation. Cutting poverty is a key priority, and that means reducing corruption to make sure that growth gets to those who need it most. The good news is that the political stability Yudhoyono has helped create is making that more possible than at any time in a decade.

Loving Indonesia requires patience and a certain tolerance for the unpredictable.

Case in point: A new anti-pornography law, in accordance with Islam’s teachings, making it illegal for women to bare their shoulders or dance in a sexually appealing manner. It’s a real drag for Bali’s tourism industry. Economic reality can be surreal, too. Southeast Asia’s biggest oil producer is also a net importer of oil products.

In a world awash in decidedly bad news, though, a place set to grow 4 percent may be worth the hassle.

(William Pesek is a Bloomberg News columnist. The opinions expressed are his own.)

To contact the writer of this column: William Pesek in Jakarta at wpesek@bloomberg.net