Another Emerging Asian GiantIndonesia’s stock-market has once...

Another Emerging Asian Giant

Indonesia’s stock-market has once again been a global leader on the upside, and the best performer in Asia since the end of 2010 – but how many of us have invested there?
This huge nation is overshadowed by the region’s even larger ones. Yet, unlike China and India, individual investors have free access to its shares listed in Jakarta. And, unlike Japan, it’s packed with fast-growing companies.
It is both a play on natural resources, like Australia, and on surging consumer demand from an exploding middle class, like India.
Commodities account for two-thirds of its exports. It’s the biggest supplier of globally-traded coal and palm oil. It has copper, nickel, tin and gold. It has the greatest proven reserves of natural gas in the Asia-Pacific, which it already ships in liquid form to Japan and India.
But its economic growth, expected to reach 6 to 6½ per cent this year, is also driven by strong private consumption, with consumer confidence rising as Indonesia proves its capacity to withstand the impact of sluggish growth in the US, crisis in Europe and slowdown in China.
The economy is also being boosted by an accelerating investment cycle. It now has the second highest investment-to-GDP ratio in Asia after China, running at 32 per cent of nominal GDP. Yet, unlike China, there are no worries about investment being excessive, as Indonesia actually needs huge upgrading of its infrastructure.
Its economy has grown at annual rates of more than 5 per cent in seven of the past eight years. Even in 2009, when many countries slumped into recession with the bursting of the credit bubble, Indonesia managed to achieve growth of 4½ per cent.
Last year it grew at the fastest pace since before the Asian financial crisis. OECD expects it to be the only major economy that will grow faster over the next five years than it did over the past five, achieving an average 6.6 per cent.
Foreign investors are increasingly drawn to the profitable opportunities in what is Southeast Asia’s largest economy. They poured in a record $20 billion last year, up from $17 billion in 2010.
The attractions are not only the strengths in natural resources, consumer demand and capital investment, but also the broader fundamentals:
? No debt problem to hold back economic growth. With economies of world leaders such as the US and Germany loaded down with public debt ratios of above 80 per cent of GDP, and still rising, Indonesia’s figure of around 30 per cent looks great.
There is no private debt problem, either. After the trauma suffered in the wake of the 1997/98 Asian crisis, when their economy contracted by 13 per cent, the recapitalized Indonesia banks have pursued conservative lending and investment policies, while companies and consumers have been conservative borrowers. So… no sub-prime or similar officially-promoted rubbish to poison the credit system.

Rating agencies Moody’s and Fitch recently upgraded the nation’s sovereign debt to “investment” ranking, a category that now allows pension and other long-term institutional funds in the West to invest in Indonesia.
Last month the country achieved a record-low yield on the largest-ever longdated bond issue in Asia, selling 30-year securities at a yield of just 5.375 per cent in its national currency, the rupiah.
? The annual fiscal deficit is minimal (at 1 per cent of GDP), inflation remains benign (at a 22-month low in January of 3.65 per cent a year), forex reserves have more than doubled since 2008 and the rupiah has strengthened steadily against the dollar.
? Rising incomes are producing an exploding bourgeoisie. Nomura, the Japanese bank, reckons Indonesia now has a middle class – which it defines as households with an average disposable income of more than $3,000 a year – of about 50 million. It could reach 150 million within a few years, making it larger than India’s.
Unlike China and Japan, it has favourable demographics. More than half its people are younger than 30. Some 2 million leave school every year and pour into the work force. This is driving down the dependency ratio of retirees to workers.
The big problem of the Indonesia economy is infrastructure, which is seriously deficient after more than a decade of under-investment following the Asian crisis.
Ports are clogged, roads are seriously congested and there are frequent blackouts in power supply. It costs more to transport goods within the country than to import them. Cement costs ten times more in the province of Papua than on Java.
Ordinary folk are deprived of basic services. Two-fifths of Indonesians live without electricity and even fewer have access to clean water. Public transport is “a nightmare.”
Yet it seems that a breakthrough is coming at last.
A major obstacle has been difficulties in procuring the land needed for public projects. There are legal uncertainties such as thousands of overlapping claims to title, bureaucratic processes that are complex and riddled with corruption, and the owners well-informed by political insiders are able to hold out for high acquisition prices.
Comparing the Asian giants
Indonesia China India Japan
Size of the economy 989 8,130 2,367 6,410
GDP $ billion
Economic growth rate 6.3 8.2 7.8 2.2
Annual percentage
Population 248 1,328 1,220 126
Millions
Living standards 3,990 6,120 1,940 50,830
Annual $ GDP per person

However in December parliament at last passed a land clearance law. If this is implemented this year, it should mean extensive land acquisition for public infrastructure projects will be able to start next year.
The new law will pave the way for government to acquire land for construction of roads, ports, power plants, airports, railways, dams and oil processing facilities. It will be able to evict people, providing for landowners to be given fair compensation in cash, alternative land, or other forms of payment.
It also establishes a legal process for the objections of landowners and other community members to be heard, but the time taken up by processes from start to finish will be reduced from five or more years to just 18 months.
Plans are also at last being tendered for the first phase of a mass transit system for the capital – 15 km of “skytrain” and underground railway expected to cost up to $2 billion.
A boom in infrastructure investment, coming with all the other positive factors, could at last lift Indonesia’s economic growth to the double-digit levels of China that it has so far failed to achieve.
There is already a boom in real estate, which is likely to be fuelled further by the Housing Ministry’s plan to force the subsidized mortgage lender BBTN to offer cheaper loans to encourage home ownership. In Surabaya, a major city, property prices have tripled in six years.
Megacorps are hungry for their share of the action
Foreign multinationals are showing increasing interest in profiting from the Indonesian growth story.
The nation is becoming one of the world’s last great car markets. With a low ownership ratio, the fourth largest population, and a lot of increasingly affluent young people, there is huge growth potential. Total vehicle sales are expected to reach nearly a million this year, and three times that within a decade.
Global carmakers are scrambling to hold on to or expand their share. Toyota is doubling its capacity, Suzuki is building an engine plant, GM reactivating a factory it shut down some years ago.
There are, of course, some negative factors, apart from the major one of infrastructural constraints.
Corruption is endemic, with ongoing warfare between anti-corruption forces and powerful business and political elements defending their turf. President Susilo Bambang Yudhoyono (“SBY”) has become unpopular and could fail to secure re-election. There is a danger that financial policy could be too strongly stimulatory, spurring inflation.
Yet international confidence is growing. Standard Chartered Bank expects Indonesia to be the sixth-biggest economy in the world in less than 20 years, bigger than either Germany or the UK. Expats are returning home, and repatriating their capital. The boom is creating a new generation of billionaires.

If you are interested in investing, this could be a good time. So far this year Indonesia has been the worst-performing Asian market, but the strength of its long-term trend suggests this is a buying opportunity.
Morgan Stanley analysts say the outlook for its shares remains good, with the strength of domestic demand supporting earnings, which they expect to rise an average of 15 per cent this year, or four percentage points more than the rest of Southeast Asia.
There are many Indonesia ETFs, mutual funds and trusts available. But if you prefer to invest directly into Jakarta-listed shares, here are some suggestions:
Astra International [ASII] is one of the largest diversified conglomerates. It is the biggest automotive distributor and producer in partnership with Toyota and other Japanese brands. Other core businesses are in financial services, heavy equipment, agriculture, infotech and infrastructure. Main shareholder is Singapore-based Jardine Matheson. Annual growth in earnings-per-share has averaged 21 per cent over the past five years, and it has a dividend yield of about 2.4 per cent, 2½ times covered.
Semen Gresik [SMGR] is the biggest cement producer, with a capacity of 17 million tons a year. Its EPS growth have averaged 29 per cent a year over the past five. Currently it has a dividend yield of around 2.7 per cent, twice covered.
Jasa Marga [JSMR] develops, builds, manages and maintains toll roads, of which it currently operates 13, including Jakarta’s ring and airport roads. Its annual EPS growth has averaged 56 per cent. It has a dividend yield of about 2.3 per cent, almost twice covered.
Surya Citra Media [SCMA]. An interesting small-cap. It operates television stations, distributes media content and provides multimedia consultancy services. Earnings-per-share growth has averaged an annual 51 per cent over the past five years, and the rise in the stock price has been spectacular. There’s an excellent dividend yield of 5.2 per cent, but that’s only just covered by earnings.
Unilever Indonesia [UNVR], the subsidiary of the Anglo-Dutch giant, is a heavyweight play on growth of consumer demand. It’s achieved EPS growth averaging 19 per cent a year, now offering a dividend yield of about 2.9 per cent… but not fully covered by earnings.
Adaro Energy [ADRO] is Indonesia’s second largest coal mining group, which means it’s world-class. It has enormous reserves in the South Kalimantan province – 3 billion tons of open-cut coal in extremely thick seams and exceptionally low sulphur content. EPS growth has been very strong. The current dividend yield of about 1.6 per cent is four times covered.
Indofood Sukses [INDF] is the nation’s biggest food manufacturer and distributor – it’s even the world’s largest noodle maker. Its earnings growth has been phenomenal, averaging 87 per cent a year. The share offers a dividend yield of about 2.7 per cent, 2½ times covered.
Credit Suisse economist Kun Lung Wu says Indonesia “will remain a beacon of growth in a world where growth is scarce.” With its strong, broad-based economy and relative political stability, could this be, as some claim, “the next India or China”?