Richard Ness : Blog : Investment Climate and Environment: A Tale of Two Issues

Investment Climate and Environment: A Tale of Two Issues - 01 Apr 2007
by Eric

When you see an inverted U-shaped curve for investment growth for a country, it is a clear sign of economic. And you think “….it is the worst of times….” And that is indeed what you see for Indonesia.



Investment and environment is the pair of issues that I want to focus on in this blog. Dear Investor, I know you’re watching this case just about as much as I am and have never really yet addressed anything in this blog to you. So I thought I would dedicate some time to share with you some of my thoughts as well as what others have been saying about how this case could impact the investment climate in Indonesia.

And as shown in the chart, the timing of the Buyat case when it broke in the third quarter of 2004 coincided with the tipping point that initiated the downward slide for investment which has now culminated into a situation of negative growth rate in 2006. The chart is not meant to show that the Buyat issue caused the decline. But the chart definitely shows that the Buyat controversy embodies all the signs of a failing legal system that is keeping the investors away from Indonesia.

There is no doubt that the Buyat case has rattled investors’ confidence in Indonesia. Right from the onset of the Buyat case in 2004, market experts have sent warning notes about the adverse investment implications for Indonesia. First it was Marc Upcroft of PriceWaterHouse who commented in the context of the Buyat case in 2004 that: “It’s being watched by all mining companies here, by most foreign investors regardless of what industry they're in and certainly, by mining executives around the world there is a lot of attention being put to it. Is it enough at this point to make others either stop or at least second guess their plans? I think they are already second guessing before this happened” [link].

Now three years later, on the 29th of March 2007, the front page of the Wall Street Journal carried a story titled “Jakarta’s Newmont Suit Risks Investment Fallout”.

Leading investors and market experts have continually highlighted that the Buyat case exemplifies the problems investors face in Indonesia. It is indeed an unfortunate situation because considerable investment is flowing into the region (see UNCTAD’s World Investment Report-2006). But South and East Asian economies like China, India, Thailand and Vietnam continue to steer investment away from Indonesia because business leaders find the judicial system comparatively more predictable in these countries.

In the Enterprise Survey conducted by the International Finance Corporation, more than 75% of business executives expressed confidence in the judicial system in China, India, Thailand and Vietnam. In comparison investors’ confidence in Indonesia’s judicial system was significantly below the average for the East Asia and the Pacific Region in 2003, which was even before this case had started.[link] I bet you by now the trust in Indonesia’s judicial system must be at its nadir. For instance, Indonesia was ranked second from the bottom in the World Competitiveness Scorecard for 2006. [link]

The data and the comments by various business leaders complement each other. On 5-Aug-2005 the Associated Press quoted a leading Indonesian business leader as saying that: “Who will invest in this country? Nobody,’ said Jeffrey Mulyono, director of the Indonesian Mining Association, pointing out that an uncertain legal and business climate has already caused mining investment to fall more than 50 percent in the last five years.”

Another influential business journal Fortune reported in its 8-Aug-05 story on this case that: “Government officials privately worry about the signals that Newmont’s plight sends abroad. Indonesia desperately needs investment in resources – as a Java-wide electricity brownout the day after National Day suggested – but foreign capital is spooked for the time being. ‘It certainly gives us pause for thought,’ says Peter Fanning, chairman of Indonesia’s International Business Chamber, the umbrella group for a number of foreign business lobbies. ‘These situations can destroy business confidence in this country.’ Investment levels suggest as much. In 1997, $2.6 billion of new foreign investment was made in Indonesian resources. Last year, it was just $177 million. Fanning believes Newmont, which was closing the exhausted Buyat mine when the claims flared, was the victim of a last-minute squeeze attempt by powerful local officials. Wall Street is watching closely.”

And on 20-March-2007, the Rocky Mountain News quoted the Newmont Chairman Wayne Murdy saying, “That an unfair verdict would force the Denver gold producer to rethink its plans in Indonesia”.

Further, my Dad has said a number of times that, “you need rule of law, you need sanctity of contracts, and you need protection of human rights - that's a prerequisite for doing business in any country and I would say that it is with this case you see these factors erode.” The negative direction of the investment growth curve shown in the chart captures the sentiments of the business leaders interested in Indonesia.

But most importantly, as the flow of investment has declined since 2004, Indonesia’s economy has seen a steady rise in the unemployment rate to around 11% in 2006. This implies that there are more than 10 million unemployed persons in Indonesia now. This number is expected to grow by an additional 2.5 million in 2007 [Jakarta Post 17th March 2007]. And it is this number that shows that the individuals who manufactured the Buyat case have in essence really hurt the economic welfare of millions of Indonesians who could have been gainfully employed if Indonesia had continued to attract investment rather than deflecting it away to other countries in the region.

It has become clear now that persons who initiated this case against my Dad are against public welfare, and are contributing to the rising unemployment rate in Indonesia. By hindering economic progress, the perpetrators of the Buyat controversy are also holding back Indonesia’s progress towards clean environment.

The 18th of April 2007 would be a verdict on whether or not Indonesia wants investors here. Investors vote with their feet. We will see if they walk towards or run away from Indonesia.



Videos
[link] CNBC Singapore Interview
[link] ABC Late Line Business Interview
[link] Bloomberg Interview
[link] Investment Clip [Channel 9 w/ Ali Moore]