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Indonesia graft fight falters
Published in The Saudi Gazette on 18 - 12 - 2010

Indonesia's selection of less aggressive candidates to head anti-graft institutions and failure to make progress on big corruption cases show its drive to reduce graft has faltered – but that is doing little to deter foreign investors.
President Susilo Bambang Yudhoyono attracted voter support and increased investor confidence last year on hopes he would make further progress in his second term in reforming graft-ridden institutions in one of Asia's most corrupt countries.
But the continued depth of the problem has been highlighted in recent months by the success of vested interests in weakening anti-graft body KPK, and by revelations of an allegedly corrupt tax official who bribed his way out of prison.
Analysts say Yudhoyono is unlikely to achieve much reform of corrupt legal or tax systems that increase risk for investors, but impressive stability in managing Indonesia's finances and strong economic growth will draw further portfolio and foreign direct investment (FDI).
“When you weigh up the risk factors, the opportunities in Indonesia are a lot greater. While there is corruption, actually there is corruption everywhere,” said Julia Goh, an economist at Malaysian bank CIMB, whose Indonesian subsidiary saw third quarter profits jump 46 percent and its shares triple in 2010.
Fund managers say corporate governance is the biggest risk for equity investors, but that has not stopped a 41 percent rally in Jakarta stocks to record highs this year. An exception was top coal miner Bumi Resources , whose stock slumped about 30 percent by mid-year on concerns over governance and high debt, but that was seen as a buying opportunity despite the risks and the stock has rebounded.
“It will always be an issue. Over the last year or two markets have been less focused on the corruption issue because of the favourable environment,” said Chua Hak Bin, director of global research at Bank of America Merrill Lynch in Singapore.
“This issue may come back to haunt – it's probably a bit worrying that investors have been willing to push it aside, not just corruption but other reforms, and as valuations get higher investors may get more demanding.”
While corruption acts as a drag on the economy, booming exports of commodities such as coal and rising consumer spending mean solid six percent growth is expected again next year. For bond investors, who have piled into government debt to drive down 20-year yields by 1.45 percentage points this year, this growth plus falling government debt levels and the prospect of a ratings upgrade to investment grade status next year are likely to outweigh any graft risk.


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