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Tuesday, April 11th, 2006
Follow Condi to Indonesia
Secretary of State Condoleeza Rice's visit to Indonesia this week is hopefully the start of a much closer and broader relationship. This would be great news for Indonesia and America, the Asia-Pacific region and global investors.
The headlines will of course focus on global terrorism and the pivotal role Indonesia plays as the world's largest Muslim nation, the vast majority more moderate and secular than Islamic extremists. Fair enough. For this reason alone Democratic Indonesia warrants America's greatest attention which has been sorely lacking. If we win in Iraq and lose ground in Indonesia, are we really better off?
A second great reason to be more fully engaged with Indonesia is trade and investment. It is a triple play of fostering higher economic growth and incomes in Indonesia, jobs and growth for America and maintaining America's influence in the region which is being undercut by powerful Chinese economic diplomacy. In fact, we need to pay more attention to Indonesia than the Chinese do.
Indonesia's President Yudhoyono, a combination of General, intellectual and bureaucrat, has made real progress in fostering market reforms. Many would categorize Indonesia as a relatively poor country but I beg to differ. I have toured Indonesia from tip to tip and it is a country with many assets and great promise. Rich in natural resources, a talented and young population, strategically positioned to benefit from Asian growth, a size three times the that of Texas and the world's fourth largest population. As a relatively young democracy and developing economy it lacks an important ingredient for economic growth: capital and a fiscal system to allocate it wisely.
Let's focus on just one important Indonesia asset that could dramatically jumpstart its economy and stock market while unleashing resources for badly needed education health and infrastructure. This asset is oil and natural gas and Indonesian energy production is far below its potential.
The way that oil production has been handled over the past few years is worse than a blunder and is close to a crime. Indonesia has 10 billion barrels of proven and potential oil reserves and 180 trillion cubic feet of proven and potential reserves. Nevertheless, Indonesia, Asia's only member of OPEC, became a net importer of oil in 2004.
Help is on the way. After five years of tough negotiations, Exxon Mobil and Pertamina will sign a joint-operating agreement this week
Exxon Mobil has operated in Indonesia for a century and invested $17 billion in the country, agreed to explore the dormant Cepu area years ago and by using advanced technology, found proven oil reserves of 600 million barrels and 1.7 trillion cubic feet of gas. Prepared to invest $3 billion to develop the project, it has been waiting for two years to move forward as Indonesia's state-owned energy company Pertamina waited for a better deal. Meanwhile, Indonesia's oil production levels have fallen to less than 900,000 barrels a day!
At peak production, Cepu would provide the GOI about $2 million per day in revenues, add 180,000 barrels a day in daily production and eliminate gas shortages in East Java. There are other projects that could be moved forward and in total could lead to baking an economic pie that could help lift all of the Indonesian people. Moving ahead with these projects would jumpstart the economy and bolster the confidence of foreign investors and capital markets. This is certainly a better option than sharply raising interest rates that choke economic growth and makes badly needed capital even more expensive.
The Indonesian stock market has been one of Asia's best this year up 14.2%. Markets should respond favorably to this deal and I suggest aggressive investors take a look at the closed-end Indonesian Fund (IF) as the best vehicle to invest in Indonesia. It is managed by Credit Suisse Asset Management and trades at a premium of 7.7% to net asset value with a price of $6.87.
Although this joint venture will help Indonesia once the oil starts flowing in 2008, it is important that America not just be seen as backing big oil and mining interests. We need a bottom up strategy that gets into fabric of Indonesia village by village. Indonesians need clean water, nutrition, power, consumer products, autos, consumer financing and much more. There is no reason American businesses cannot provide them.
Indonesia has taken the brave step of opening its financial services sector to majority investment by international investors; let's also open up other areas such as infrastructure and power. The most important reform to make Indonesia more attractive to international capital is to set up a transparent and clear approval process to cut out red tape and corruption. Then reinvigorate a previously announced plan to privatize some of Indonesia's 145 largest state-owned companies to increase their profitability and raise more government revenue. Finally, why not follow ten other countries by putting in place a flat tax to rein in bureaucracy, stymie corruption and stimulate growth and productivity.
America needs to be seen as an active and close friend of Indonesia as it continues on the track of democracy, prosperity and progress.
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