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Indonesia's Government Saves the Bakrie Empire
Written by Our Correspondent
Thursday, 16 October 2008
Government companies step up to buy shares in a flailing family group
As it has in the past, the Indonesia government stepped in Wednesday to
stop the unravelling of the empire of the politically powerful Chief Welfare
Minister Aburizal Bakrie with a deal to allow government-owned companies to buy
shares in Bakrie concerns - and apparently let the Bakries stay in control.
Shares in Bakrie & Brothers and its five subsidiaries, PT Bumi Resources,
Energi Mega, Bakrieland, Bakrie Telecom and Bakrie Sumatera Plantation were
suspended from trading on October 6 amid wild gyrations in their share price
that wiped out 30 percent of their value, with a devastating effect on the rest
of the local market. The Indonesian Stock Exchange was closed for three days
amid the carnage after falling by 21 percent, the biggest fall in 20 years.
The market reopened Monday but without the Bakrie companies, which
remained suspended while the group said it was working on a deal to sell a raft
of assets -- including a stake in coal miner Bumi, at one time the biggest
company on the exchange - to pay off $1.2 billion in debt. Shares in Bumi are
down 74 per cent since their peak in June.
However, the Minister for State Enterprises, Sofyan Djalil said Wednesday
that state-owned PT Aneka Tambang and PT Tambang Batubara Bukit Asam would be
allowed to buy shares in Bumi if they want, which almost certainly means they
will. That way the Bakrie family may still be able to maintain control over the
company despite a reduction in their 35 percent stake.
That decision is likely to be greeted by less than enthusiasm on the part
of the electorate, and could spell trouble for President Susilo Bambang
Yudhoyono, who has made erasing corruption and cronyism a major goal of his
administration, so far with less than notable success. Although he has moved up
recently in the polls, Yudhoyono is locked in a close race with former
President Megawati Sukarnoputri in the runup to the presidential election next
April.
While the Bakrie enterprises are hardly as important to Indonesia's
economy as Fannie Mae or AIG are to the US, the alternative to saving Bakrie is
not saving him, something that could be politically unappetizing for Yudhoyono,
who so far doesn't appear to consider himself independently powerful enough to
let the Bakrie group go.
Despite the fact that he was a general himself, Yudhoyono got
considerable backing for his 2004 election came from Kadin Indonesia, the
Indonesia Chamber of Commerce, which has long-standing links to Sofyan's
State-Owned Enterprises Ministry.
Kadin is a national network that reaches across Indonesia and although it
isn't a political party it is comparable in reach to Golkar, Megawati's
Indonesian Democratic Party of Struggle (PDIP) or Tentara Nasional Indonesia,
the armed forces. Golkar, the biggest electoral party and once the vehicle of
the late strongman Suharto, backed the former armed forces commanding general
Wiranto, leaving Yudhoyono to look elsewhere for support. The chamber was
important to his election plans and allowed him to cast himself as a friend of
business
Bakrie is also close to Vice President Jusuf Kalla, a man in an uneasy
relationship with Yudhoyono and who could easily turn into a presidential
rival. Bakrie and Kalla represent an Indonesia of an earlier era that Yudyono
can't quite shake despite his best efforts, nor can Indonesia with its culture
of corruption.
Earlier this year, although scientists insisted the disaster was caused
by dodgy work, the government took responsibility for the multi-billion dollar
cleanup of Indonesia's worst-ever environmental disaster, which occurred in
2006 when a gas well being drilled by PT Lapindo Brantas, a Bakrie-controlled
company, blew out into a catastrophic mudflow that so far has displaced 75,000
villagers and wrecked a vast swath of territory in East Java. Bakrie has so far
paid out Rp4 trillion to the displaced villagers.
Whatever the rescue package looks like this time around, the power of the
Bakrie Group will almost certainly be diminished, in the short term at least,
as it struggles under a mountain of debt. There has been much speculation over
the past year about Bakrie's plans to rival Qatar Telecom for a stake in the
country's second biggest mobile phone player Indosat and do a deal with three
local governments to eventually takeover the profitable Batu Hijau copper and
gold mine, now operated by US mining giant Newmont.
But the Bakrie family will instead be focused on disentangling itself
from debt arrangements, where shares in its subsidiaries have been used as
collateral. Those pledged shares, initially valued at US$$6 billion, slumped to
US$1.35 billion on October 6, creating the current mess.
While the focus has been on the Bakrie family, the impact of the global
financial crisis on Indonesia is much broader. Investors around the world are
now officially risk-averse, and that means pulling money out of emerging
markets like Indonesia, despite its strong economic fundamentals and 6.5
percent annual gross domestic product growth.
Earlier this week, the government boosted deposit insurance to cover
accounts up to Rp2 billion (US$203,000) from Rp100 million previously, in a bid
to avoid a run on the banks. Bank Indonesia has also eased the rules for banks
raising short-term funds in an effort to increase liquidity.
The government also reduced its forecast 2009 budget deficit to 1.3 per
cent of GDP from 1.7 per cent. That means it will require less funds to finance
the deficit as selling bonds is harder to do in the current environment with
investors demanding significantly higher yields.
Despite these measures, the market is expected to be volatile in the
short-term, buffeted by other world markets and as it awaits a resolution on
the Bakrie companies.
Anton Gunawan, chief economist, Bank Danamon says the stock market
regulator needs to crack down on speculative trading.
"I think the stock market authorities need to go faster in trying to
punish speculators who really disrupt the market," he said. "That is the key
thing that will bring back confidence."
"The jitters are still there. Domestic investors are also panicking. It's
not just the foreign investors who want to pull out."
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