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Freeport Indonesian scandal shows need for transparency

Commodities space needs more transparency: Analyst
Commodities space needs more transparency: Analyst

A corruption scandal involving U.S. mining giant Freeport-McMoRan in Indonesia highlights the need for more transparency in the international commodities trade and the importance of capital market development in emerging markets, an analyst said Thursday.

In a secret recording made by Freeport Indonesia's chief executive Maroef Sjamsoeddin in June, the speaker of Indonesia's House of Representatives and a businessman ally of his asked for a 20 percent stake—11 percent for the country's President Joko Widodo and the rest for Vice President Jusuf Kalla—in exchange for an early extension of the company's operations in Indonesia.

"If Freeport or any other commodity company wants to divest their stakes in emerging markets, they should do so by way of IPO. That would be a level playing field, extremely transparent and would contribute to the development of capital markets in this region," said director of research at Religare Capital Markets, Nirgunan Tiruchelvam, told CNBC's The Rundown on Thursday.

A parliamentary ethics committee is investigating the case, while Widodo and Kalla have denied involvement.

Indonesia's House of Representatives Speaker Setya Novanto, denied demanding for the stake on Monday.

The case also highlights the challenges of doing business in Indonesia, where bureaucracy is onerous, laws are complex, corruption is rife and the rule of law is weak.

Earlier this year, Indonesia backtracked and changed its mind over decisions related to the building of a high-speed rail line, confusing and upsetting top investors in China and Japan.

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Widodo came into power in 2014 on pledges to fight graft and implement economic reforms.

Resource rich Indonesia is Southeast Asia's largest economy with a rapidly-growing middle class, attracting waves of foreign investors in recent years.

According to the Asian Development Bank, Indonesia will post GDP growth of 4.9 percent this year and 5.4 percent next year.

The Indonesian government already holds a 9.36 percent stake in Freeport's Indonesian operations, and is due to take another 10.64 percent stake under current regulations.

U.S.-based Freeport had sought the contract extension to give it legal certainty before investing billions of dollars in other projects in Indonesia.

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