A fresh look at Indonesia Inc.

Bank Danamon''s Sebastian Paredes talks about Indonesia post the Asian financial crisis.

In the early 19th century aristocratic Frenchman Alexis de Tocqueville proved that sometimes foreigners see a country most clearly. His views of the US in Democracy in America proved to be one of the most accurate mirrors of American society - then and now.

In the de Tocqueville vein, Finance Asia sat down with Sebastian Paredes, newly appointed president director of Bank Danamon, and asked his views on Indonesia and Asia in general. After all, Paredes, 44, has had global experience.

On May 9, Parades took on the Bank Danamon roll. But he started out at Citibank Ecuador 20 years ago, and over the years has become well versed in emerging markets. In 1995, he was named CEO of Citibank Honduras and two years later returned to his native Ecuador as Citibank's CEO, managing the business during what he describes as a particularly difficult economic and political period for the country.

In 2000, he was appointed CEO of Citibank Turkey and was given additional responsibilities for the bank's business in Israel. And then two years later he was appointed division head for Sub-Saharan Africa, based in Johannesburg.

Now, in Indonesia, he faces a country still grappling with the Asian financial crisis while coping with more recent troubles, such as fuel shortages amid high oil prices. And he faces a country looking to minimize the number of banks.

Do you see a resolution to the fuel problem any time soon?

You know, one of the most difficult things for a government is to handle both the dimensions of its own government health and at the same time provide social balance. It's very hard to determine where the balance of the subsidy issue lies.

I think that the government made a very important step in March when it raised the price of petrol and as a newcomer I saw an incredible resilience from the customers in Indonesia, from the public at large to accept that increase, whilst I've been in Latin America and other countries where social turmoil would have happened.

Well, it's happened here before.

Ya... But also, now we are beginning to see some domestic investment fueling GDP growth, but up until now, for the past two-or-three years or so, the GDP growth has been fueled by consumer-led demand. And when you impact the purchasing power of consumers, the big question then is how much will this effect GDP growth? And how much can the country support this subsidy and how big is the subsidy in terms of the fiscal burden that it brings.

So it is a very delicate question in the sense of what is the right balance. One can very easily venture to say this is right or this is wrong but you know if the oil price stands at the current levels or even goes beyond, the question isn't what is the impact on Indonesia but the impact on the world's growth? If the world's growth is effected, then Indonesia will be affected.

My main worry is how long will the oil price stay above $60 a barrel, not just for Indonesia but for world growth and the economic cycle. So far the world has resisted the price from twenty-something to $60 in an amazing way.

When will Indonesia be free of the hangover from the Asian economic crisis?

I've been reflecting a lot about your question, because you know, in 20 years of banking experience I have been through two big banking crises. I was leading a bank in Ecuador when Ecuador melted down and I was working in Turkey when the financial crisis took place and I was closely involved when Argentina and Russia's crises took place.

You know there are some countries that come out of crises very quickly and some countries that take a long time and they have different experience. But after September 11, and the dot.com bust and Argentina and the Asian crisis, the cycles are becoming shorter and globalization is making everybody inter-linked so that capital flows in and out through countries very quickly, thus increasing volatility.

Well one could argue that it increases volatility but also levels things out

Exactly. Looking from the perspective of communication and knowledge, people right now are much more aware and quicker in reacting or acting. And after all of these events of the past five-to-seven years I think that people are more wary or more astute in how to protect themselves.

So you think that Indonesia is poised to avoid another crisis?

I think so, I think that Indonesia has done everything it has to do in a pace that allows us not to overheat and gives us time to make sure the right framework is there and that the banks are well capitalized. The regulatory structure is much more stringent and better followed. But like every other country right now, especially emergent-market countries, Indonesia is dependent upon the global-market cycles and I think that one needs to have stability and sustainable momentum. No one likes surprises and no one likes abrupt actions and I think that governments today, specifically this one, is very sensitive to that and is making sure the currency and interest rates are stable. Now Indonesia needs long-term stability to bring back confidence in investors and consumers.

The Indonesian government's recent sell-off of its interest in your bank was big news for Indonesia. It shows the government is increasingly getting out of the banking industry, post the Asian Financial Crisis, and trying to balance its own budget. How does that sell-off impact your bank?

The sale of shares from the PPA (Perusahaan Pengelola Asset, the government's asset management company) to private investors does not affect the bank in any way.

Do you think that Indonesia's efforts to go from 132 banks to 70 banks in about two years, is realistic?

There has already been a very important consolidation in the Indonesian financial sector post-crisis. We are one of the examples of that; as you know Danamon is the product of many banks. I think that Bank Indonesia and the country acknowledge the fact that there is a need to consolidate further and we respect that view. Bank Indonesia has stated that they would like to see the number of banks reduced. They have already taken the first steps towards making sure that this consolidation does take place by establishing clear rules of capital equity and capital requirements and all.

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