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Huge cigarette investment lights up prospects of economic revival JAKARTA - Suwarno drags deeply on his kretek cigarette, the scented fumes swirling lazily in the Indonesian sunshine. Strong and cheap, the exotic smoke leaves him a little dizzy, but each lungful could take his country nearer its long overdue economic recovery.

The popularity of kretek, a clove and tobacco mix enjoyed by millions of Suwarno's compatriots, last week prompted US giant Philip Morris to make a 5.2 billion dollar bid for Indonesian cigarette firm Sampoerna. With anti-smoking laws squeezing their profits in the West, the makers of Marlboro admit they see Sampoerna as a stepping stone into Asia, where cigarette markets are still growing despite increasing awareness of health issues.
But with such a substantial sum being injected into Indonesia, the Sampoerna deal also represents a change of gear for the country's troubled economy, prompting speculation that an end to financial woes could be around the corner. "As long as there is a strong investment inflow into Indonesia like this, it is going to be positive," said Wong Chee Seng, an analyst with DBS Securities in Singapore.
"People are getting more confident because of the strong government which is giving more attention to planning. There is a feeling that the new president has been able to control his cabinet with a movement towards opportunity and greater transparency." When he took office last October, new President Susilo Bambang Yudhoyono pledged to build on economic stability achieved by his predecessor Megawati Sukarnoputri after the 1997-98 Asian financial crisis.
Yudhoyono has declared a war on the endemic corruption and bureaucracy that has scared away many foreign investors while rolling out the red carpet for overseas involvement in overhauling the country's battered infrastructure. Though improvements have been slow, initial reaction is positive, with markets recording a succession of record highs. On Friday the Jakarta Stock Exchange climbed 1.17 percent to a new peak of 1,147.874.
Miranda Goeltom, the deputy governor of Bank Indonesia, said last week the rupiah was expected to strengthen against the dollar through the rest of 2005 on inflows bolstered by foreign interest on the heels of Philip Morris. "We are confident that the rupiah can still go up," she said, forecasting rates of up to 8,600 to the dollar compared to the current 9,370. "There is an expectation that the entry of investors can still happen," she said.
Tim Condon, chief regional economist for ING Barings, says Indonesia's vast untapped reserves of oil, gas and other natural resources are likely to be the main draw as investors return to the archipelago. "Despite all the problems, Indonesia is endowed with enormous resources and the world, particularly China, is interested in its potential," he said, predicting a gradual economic improvement.
"People have been waiting to see the recovery and I think it's a safe bet that there's going to be a steady pickup of inflows into the balance of payments, every year clawing back towards the levels before the Asian financial crisis." Indonesia still remains an unknown quantity for the foreign ventures with legion examples of investment gone awry. Accusations over pollution by US gold mining giant Newmont in a coastal bay in Sulawesi island have left six company executives facing criminal charges although proof that the firm dumped deadly toxins is inconclusive.
Mexican cement firm Cemex has been locked in a protracted compensation battle after the Indonesian government reneged on a 1998 agreement to allow Cemex to increase its 25.5 percent stake in Semen Gresik to 51 percent. Citigroup economist Anton Gunawan says that while the Sampoerna deal strikes a positive chord, Indonesia remains a corporate minefield. "Of course it can help confidence, but I do not think the investment climate is good enough yet," he said.
"There is interest in specific industries, the automotive and electronics sectors are expanding, but this is not the situation overall. Oil and gas still have some problems. "This deal with Sampoerna can help, but there are still structural problems related to general regulation, labour, relationships with companies and infrastructure." Nevertheless, he said predicted good returns for Philip Morris, with kretek smokers such as Suwarno ensuring steady demand.
"As long as they understand the situation in Indonesia and the local government and they stick to making changes at the top rather than shaking the whole boat, they should be fine."



Posted in Economy @ 20 March 2005 00:02 CET by Jeroen · 'Blog' RSS feed · permalink






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