Brief History

Indonesia, a Nation in Transition

Although hundreds of ethnic groups have been know as the indigenous of Indonesia for hundreds and thousands of years, Indonesia did not exist in its present form until the turn of the 20th century.

Of the so-called natives of Indonesia, archaeologists have speculated that the first people to populate Indonesia migrated from mainland China some 1,000 years ago and inhabited a stretch of islands along the equator, later known as Nusantara.

Over the centuries they built and refined their statecraft in the form of kingdoms and principalities. Sharing similar characteristics with other Southeast Asian kingdoms, these Nusantara kingdoms based their conception of state more on people than on space or territory. But intercourse with the western world changed the course of history in Nusantara.

In 1511, the Portuguese conquered Malacca, located on the Malay peninsula, which was then still an inseparable part of Nusantara. The Dutch followed in 1512 and landed on Banten shore in Java. At first, the Dutch came more as traders under the trading umbrella of the Royal East Indies Company (Vereniging Oost Indische Compagnie, VOC). For the next two centuries, the Dutch conducted business with the natives, although in many cases the trade was not on equal terms. Often, trade was accompanied by violent pacification processes.

Then the VOC went bankrupt and the Dutch government took over the business in Nusantara (called the East Indies by the Dutch). Starting from about the mid-seventh century and lasting until the arrival of the Japanese in 1942, was the "real colonization" called "high colonialism" in literature. The period was disrupted briefly when the British took over colonial rule in 1811 to 1814. Among other things that the natives learned from colonization was statecraft based on territorial conception rather than on people.

In the early 20th century, the natives of Nusantara learned that as diverse as their ethnicities were, they could imagine themselves as a unified community. A nationalism had grown in a process that Benedict Anderson, a doyen of Indonesian studies, calls an "imagined community". During the first half of 20th century Nusantara, its people built an imaginary nation called Indonesia -- the name itself was borrowed from the West. By the end of the 1930s, it was clear that the end of Dutch colonialism in Indonesia was only a matter of time.

During World War II, 1942-1945, the Japanese occupied Indonesia. Although short-lived, the occupation enabled Indonesians to arm themselves for the very first time. Shortly after Japan's defeat in WWII, Sukarno and Hatta proclaimed Indonesia an independent state, and they became the founding fathers of the new country. The largest archipelago in the world, with over 17,000 islands -- only 3,000 of which are inhabited -- has emerged into a new Indonesia.

When the Dutch returned and tried to reestablish colonial rule, armed Indonesians resisted. The Dutch were forced to recognize an independent Indonesia in 1949.

The new Indonesia adopted a federal system of governance for a short time. But for a longer period, within a five-year span (1950-1955), leaders of the new country were eager to adopt a liberal system of government. Although there is no proof that the system ruined the economy, it was clear that the elite's political stability was shaky. The longest serving prime minister was only two years in office.

The government then held a general election in 1955, the first and only democratic general election Indonesia ever had. But feeling that the country was still unstable two years after the election, president Sukarno, backed by the Army, declared the 1950 Provisional Constitution void and reintroduced the 1945 Constitution. The latter provided an ample opportunity for Sukarno, popularly known as Bung Karno (Comrade Sukarno), to balance three political powers -- the Indonesian Communist Party, the Army and himself.

In the first half of the 1960s, Bung Karno leaned toward the left. On domestic politics, he was trying hard to balance the communists and the Army; on the international stage he was establishing himself as leader of a new world, free from Cold War antagonism. But economic decline and mounting conflicts, especially between communists and noncommunists, the latter of which was backed by the Army, caused him to lose control over the situation.

Friday, April 20, 2007

The Jakarta index is booming, but Indonesia remains risky

Indonesia's benchmark stockmarket index has hit record highs recently, buoyed by a combination of beneficial factors that include strong economic growth, falling interest rates, optimism about forthcoming company results and the approval of a new investment law. However, like many emerging markets, Indonesia remains vulnerable to changes in investors' appetite for risk, especially with valuations currently higher than in most other markets in the region. Nonetheless, the prospect of accelerating economic growth and a big pick-up in capital spending in 2007 suggest that, barring major shocks, investors will remain bullish for the time being.

On April 17th the Jakarta Stock Exchange (JSX) Composite Index closed at 1,965.4, a fresh all-time high, and there is increasing optimism that it will breach the 2,000 level soon. The market has hit ever higher record levels in recent weeks. Although its April 17th close is only about 9% higher than at the end of 2006, this marks a 69% gain since the end of 2005. Last year the JSX Composite Index was one of Asia's star performers, outperforming most other markets including even India's soaring Sensex, although perhaps unsurprisingly the JSX's growth was still eclipsed by the 130% rise in Shanghai's composite index.

A healthy macroeconomic picture, supported by political stability, has been one of the key factors in the JSX's recent success. Indonesian GDP growth hit a two-year high in the fourth quarter of 2006, and the central bank's key interest rate has fallen to 9% from 12.75% a year ago. Lower interest rates are widely expected to have boosted corporate results due out soon, and this may explain some of the market's recent success.

The Economist Intelligence Unit expects interest rates to fall further during 2007, lowering borrowing costs both for businesses and consumers. This is reflected in our optimism that there will be a pick-up in private consumption and fixed investment growth in 2007. Consumer spending accounts for around 62% of GDP and in Indonesia's case is helpful in insulating companies to some degree from the vagaries of external demand. This could be useful in light of the expected slowdown in the US this year. We forecast private consumption growth will rise to almost 4% this year (from 3.2% last year). This should be good news, in turn, for many of the listed companies that sell to the domestic market and depend on robust demand there for their profits.

Meanwhile, we expect gross fixed investment to grow by 10.6% in 2007 and to increase by almost the same amount next year as well, up from 2.9% growth in 2006. Investors are likely to have been reassured by the recent passage of a new investment law. Although the law is no panacea--it is short on all-important implementation details, and other systemic problems in the business environment will continue to deter less adventurous investors--it is nonetheless a step in the right direction in terms of making Indonesia more investor-friendly. Indeed, its approval may already have contributed to recent rises in the JSX Composite Index, with investors anticipating increased inflows of foreign capital on the basis of measures in the law that provide for equal treatment, in principle, for foreign and domestic investors. The law also reduces the number of sectors closed to foreign investors and includes provisions for tax breaks and other incentives.

Despite this optimistic picture, there are also grounds for caution. The market remains volatile. Three times since the start of the year it has suffered sharp falls, partly as a result of contagion from problems in other markets (although to be fair, most other Asian markets have suffered similar fates). But Indonesia remains a high-risk market, and it is inherently vulnerable during bouts of global or regional market turbulence. Moreover, the very scale of the JSX Composite Index's gains also makes a corresponding downward correction that much more of a worry. In the 24 months to March, Indonesian equities rose by around 80%, compared with a median of around 45% in ASEAN. Valuations may also be on the high side. The average price-earnings (P/E) ratio of the JSX is currently 20.2, lower than China (22), New Zealand (22.5) and Japan (26.6) but higher than in most other Asian markets. In Singapore the average P/E ratio is 15.3, and in Thailand it is 10.4, although this probably indicates that political instability has lowered valuations.

Other factors may also affect Indonesia's stockmarket prospects in the months ahead. In terms of the macroeconomic environment, in 2007 the central bank will have less scope to lower interest rates than in 2006 as the differential with rates in OECD countries will narrow. So falling rates, on their own, will play a smaller role in driving the stockmarket's performance. Notwithstanding our optimism about Indonesia's domestic economic prospects, conditions for exporters will also become more challenging as the US economy slows (although, happily, we expect this to be offset by the strength of demand in Japan and China). By next year, the 2009 presidential and parliamentary elections will also be in sight, and though still a relatively distant prospect, the approach of these elections may increase uncertainty and volatility, possibly causing international investors to become more risk-averse and to reduce their exposure to Indonesia.

Source

Posted by I love Indonesia at 12:45 AM

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