A Dilematic Situation over Calls for Dismissing Sri
Mulyani and Boediono
JAKARTA,
KOMPAS.com - Indonesia’s Bank Century inquiry has little to do with banking(1)
— it is just the latest battleground in a war between reformers and traditional
business elites that will
decide the fate of two key pro-market allies of the president.(2) The
outcome of this particular battle is crucial for foreign investors and
Indonesians alike when it comes to pushing ahead with much-needed reforms and
generating a faster pace of growth in southeast Asia’s biggest economy.
If
Finance Minister Sri Mulyani Indrawati and Vice President Boediono, the two
technocrats in question, remain in their posts, then prospects for reform should improve(3), and President Susilo Bambang Yudhoyono
will have more clout to tackle graft and take on the overhaul of the civil
service, police and judiciary(4). But if either Indrawati or Boediono — or both
— are forced out(5), Yudhoyono will have been severely weakened, reducing
prospects for reform in the remainder of his five-year term.(6)
“This is a contest between two forces — reform
and anti-reform,”p(7) said Aleksius Jemadu, a political analyst at Pelita
Harapan University in Jakarta. “If you look at what Sri Mulyani has done as
minister of finance, many people appreciate it, but it’s a threat to others. There are people who will be put at
risk because of her policies, for instance her tax policies.(8) Some
people feel threatened by her policies, so are trying to get rid of her through
this scandal.”
Indonesia has been a star performer among
emerging markets in the past year,(9) due to strong
fundamentals, a thriving domestic consumer market, but also crucially because
of hopes Yudhoyono would press
ahead with reforms to unlock even faster growth.(10)
Many
analysts say an upgrade of Indonesia’s sovereign debt to investment grade is
within reach in a couple of years. It has been widely tipped as the country most likely to join the “BRICs”
— Brazil, Russia, India and China — in the select group of essential emerging
markets investors cannot afford to ignore.(11)
Prolonged
conflict over reform could put that at risk. “In the longer term this would clearly impact people’s
appetite for Indonesia,” said James Bryson(12), a Jakarta-based
investment advisor at fund manager HB Capital.
“If
that rumbles on it makes it less likely that the ratings agencies upgrade
Indonesia’s sovereign rating. If progress in these areas and cleaning up the
institutions isn’t made, then Moody’s, S&P will be slower to upgrade any ratings(13).”
Powerful
enemies
As
finance minister, Indrawati has cleaned up Indonesia’s notoriously corrupt tax
and customs departments in an effort to increase state revenues from tax and
duties and reduce the country’s reliance on bond issues to fund the budget
deficit. To get an idea of the
scale of tax evasion in Indonesia, last month, the tax department produced a
list of the 100 worst tax dodgers which it said owed a total of $1.9 billion in
taxes in 2009(14), equivalent to one-tenth of the amount that Indonesia plans
to raise in the bond markets this year.(15)
Among
the various state and private sector firms on the list was a coal-mining
company controlled by Aburizal Bakrie, a tycoon and politician who has clashed
with Indrawati and who is seen as the driving force behind efforts to remove
her. Bakrie isn’t the only tycoon feeling the heat from the tax department. Last month, Yudhoyono asked police
to help the tax department pursue dodgers and there are signs that other tax
cases which had languished are being pursued more aggressively.(16)
While
the Bank Century case is unlikely to have a short-term impact on economic
growth, a slower reform push
would have a longer-term impact.(17) For years, Indonesia has lagged emerging market giants
China and India in terms of its growth rate.(18)
Investors
were reluctant to stump up the billions of dollars required to develop
infrastructure, including ports and tollroads, or boost the natural resources
and manufacturing sectors, because of Indonesia’s reputation for corruption,
red tape, and legal uncertainty.
These
are the main areas that Yudhoyono and his reformers have started to address.
The reforms are not only intended to attract investment, but should also reduce the overall
cost of borrowing by improving Indonesia’s chances of achieving an investment
grade credit rating.(19)
Yudhoyono
also reversed Indonesia’s reputation as a political basket case prone to
repeated bouts of instability. While few analysts or investors expect either
Indrawati or Boediono to lose their jobs over Bank Century, they recognise that
attacks on the reformers are likely to continue.
“Investors
are clearly worried that domestic politicians are more interested in fighting
over the spoils of power, than in supporting the reform process,” said one
long-term U.S.-based investor in Indonesia who declined to be quoted by name.
“With
the president’s leadership, Sri Mulyani and Boediono have been vital to
ensuring the benefits of Indonesia’s strong growth are more fairly shared by
all Indonesians. Dismissing
either reformer would lead investors to concerns that Indonesia was returning
to crony capitalism, which was certainly very painful for investors and most
Indonesians — at least those who weren’t tycoons or politically well-connected,
or both.”(20)
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