In Indonesia, and Southeast Asia, the return of optimism – and the bankers.
Building booms, easy credit, and predictions that it can only get better from here. Shades of 1996.
Denpasar, Bali — I changed flights coming to Indonesia in Seoul a few days ago and the airline picked up the regional edition of the International Herald Tribune on my stop. I went through it on the last leg of my flight, reading the business pages with particular interest. It was déjà vu, all over again.
Regional stock markets were booming, investors were excited, and the future was looking bright indeed, the series of articles I read advertised. The first article to catch my attention was a front-page piece on the Philippines about that country receiving its first ever investment grade credit rating, in this case from Fitch. The article began (subscription required):
Years of effort by the government of President Benigno S. Aquino III paid off Wednesday, when the country received, for the first time, an investment-grade credit rating from one of the world’s major ratings agencies.
That's indeed good news. But it was the boosterish tone of the article that brought back so many memories. It sounded just like the articles one could read in that and other regional publications about Southeast Asia's "dragon" economies in the mid-1990s. Credit was easy, glass and steel monuments to ambition were rising into the skies of Manila, Jakarta, and Bangkok seemingly overnight, and abundant natural resources and cheap labor were transforming the lives and expectations of tens of millions of people across the region.
Then came the big collapse. Too much credit seeking too much yield had flooded the region, corruption controls in the booming property markets of the Philippines, Thailand and Indonesia were lax at best, and it turned out that one billion-dollar venture after another had been built on sand. There were IMF bailouts, currency collapses, and billions of dollars in loses for international firms. Most important were the job losses and an erosion of living standards that affected millions of working people across the region.
Much of the advances of the great early to mid-1990s boom were lost, and it turned out that regional countries, particularly Indonesia and The Philippines, hadn't taken advantage of the good times to make the kinds of infrastructure and education investments that were required to set their national economic growth prospects on the path for steady, if unspectacular, gains.
Which takes me back to that IHT story. In third graph, the claim is made that Fitch's decision "represented an important vote of confidence" for the Philippines. Perhaps, but the lesson of the 1997-1998 collapse about ratings agencies is that they're trailing indicators: They upgrade when the market already knows the country is doing better, and down-grade when blood is already in the water. That's been recent history in other countries as well.
In the sixth paragraph the reader learns that the upgrade "reflected a persistent current account surplus, underpinned by remittance inflows, while a 'strong policy-making framework' — notably effective inflation management by the central bank — has supported the overall economy in recent years."
Unalloyed good news? Central Bank management was consistently lauded by groups like the World Bank in the region in the 1990s, particularly in Indonesia. And while remittances are helpful, they also reflect the fact that millions of hardworking, capable Filipinos are still seeking their fortunes abroad due to lack of opportunity at home. That is not the stuff of long-term growth.
The 12th paragraph, which few readers of newspaper articles ever make it to, began the caveats, key ones to my mind.
"Should the government implement policy to educate and provide jobs for the burgeoning population, the Philippines could capitalize on its demographic advantages to raise economic output,’’ the IHT quoted an HSBC research report as saying. A few paragraphs later comes a passage that could have been written in 1996:
"At the same time, the country faces considerable challenges. Infrastructure in much of the country remains poor and corruption widespread, despite progress under Mr. Aquino’s administration. Growth has generated pockets of urban prosperity surrounded by vast areas of grinding poverty and few jobs."
Those have long been the challenges in the poorer parts of the region.
I've spent my few days back in Indonesia in the tourist bubble of southern Bali. Catching up with old friends, I learned that a number of investment bankers I knew in the 1990s, who lost their jobs in the great collapse and migrated to other parts of the world, have recently returned. Along the honky-tonk tourist strip in Bali, I've repeatedly found myself lost in an area I knew intimately a decade ago: an inexorable expansion of luxury hotels and businesses, an expanding airport, yet still clearly inadequate sewage systems for local people or attention to the perils of unrestrained, unregulated growth.
In Indonesia, too, corruption remains high, long-range infrastructure planning remains poor, and a property boom - fed by capital flowing into the country thanks to China's insatiable demand for commodities like coal, pulp and paper, and palm oil -- is marking the landscape from Sabang to Merauke (a popular Indonesian phrase referring to the distance of its northwesternmost city in Sumatra to its southeasternmost city on New Guinea, roughly the distance from London to Baghdad).
For now, all is going very well. And a Twitter friend of mine once described my general approach to news as a "ray of cloud on a cloudy day." But another early impression I'll be pursuing is whether Indonesia, once again, is neglecting the fleeting opportunity generated by a great economic boom.