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No longer a nation in waiting

By Michael Preiss

31 March, 2011

The time for Indonesia has finally arrived and investors increasingly seem to take notice

INDONESIA is the world's sixth best performing stock market year to date, with about 30 per cent returns. In 2009, the Jakarta Composite Index rose 86 per cent.

  With about 230 million people, the Republic of Indonesia is the fourth largest country in the world. Within its 17,508 islands, it also has the world's largest population of Muslims.

  The Indonesian economy is somewhat shielded from risks - that is, weakening trade flows from global and China slowdown in the second half of 2010 due to its large domestic market and the small contribution of exports to the economy - about 22 per cent of GDP. Domestic-driven growth is expected to remain robust, fuelled by consumption and investment.

  Indonesia has often been called a "nation in waiting", but in 2010 and with the Jakarta Composite Index reaching and all-time record high last month, the time for Indonesia has finally arrived and investors increasingly seem to take notice.

  In Indonesia, you get very sustainable economic growth of 5.5 per cent to 6 per cent, historically low inflation prevailing for some time, a stable currency and bond yields falling to record lows.

  Foreign buying of Indonesian bonds has driven down the yield on the 10 government issues to around 8 per cent this year. Net inflows into Indonesia's bond markets are estimated to have been US$2.1 billion so far this year, making the country second only to Mexico among emerging markets in attracting bond investors.

  Although Indonesia is doing extremely well these days, it has not always been the case.

  For many years, the country underperformed most other Asian markets. Indonesia experienced a net negative outflow of capital every year between 1998 and 2002. For no other country in South-east Asia was that true, not even for a single year in that period. However, since the 2004 election of current president Susilo Bambang Yudhoyono, or SBY as he is fondly called by Indonesians, and especially after 2008, the country's fortune has turned around and with it has come a sustainable economic boom.

  Net inflows into Indonesian equities in the first half of 2010 is estimated to amount to US$971 million. At this rate, net inflows are on track to surpass last year's record of US$1.1 billion. Market capitalisation has more than doubled since 2008 to more than US$275 billion now. The goal of the Jakarta Stock Exchange is to take 75 companies public and boost market capitalisation to US$300 billion by the end of 2012.

  Indonesian equities are now valued at an average 17.5 times the consensus price-earnings forecasts and 15 times 2011 profits.

  While most Western economies are still in or near recession, Indonesia's vast natural resources and large domestic consumption-based economy show resilience and the economic outlook remains robust. Interest rates - the one-year deposit rate is now at 5.75 per cent - are expected to remain steady as investors are optimistic about the rupiah and sound monetary policies under Dr Yudhoyono.

  Investors are looking to gain exposure to shares in the natural resources, banks, infrastructure and consumer goods industries. Upcoming IPOs will include mining company PT Berau Coal, telecommunications company Tower Bersama Group, Krakatau Steel and national airline Garuda.

  Garuda Indonesian Airlines, barred from flying into Europe for six years because of poor safety records, is now the world's most improved airline, according to Skytrax 2010 World Airline Awards.

  Garuda reopened flights to Europe after the European Union's ban prohibiting Indonesian carriers from operating in European airspace was lifted in July last year. Its planned IPO is expected to raise US$300 million to support long-term growth plans of fleet and route expansion. Garuda's new daily Jakarta to Tokyo flight is full as Japan recently upgraded Indonesian government debt to investment grade.

  Japan is also the largest foreign, long-term investor in Indonesia. Not only the Japanese but increasingly many other investors are realising that Indonesia is the next big emerging market and cannot be missed out on.

  Last but not least, Indonesia is also eyeing to become the market leader in Islamic fashion. While none of the Muslim countries are capitalising on this, those in the Indonesian fashion field are set to make Indonesia the centre of Muslim fashion.

 

The writer serves as chief

Equities strategist at

Standard Chartered Bank

Boom times: Visitors filling the exhibition hall during the International Motor Show in Jakarta last month. In Indonesia, you get very sustainable economic growth of 5.5-6%, historically low inflation prevailing for some time, a stable currency and bond yields falling to record lows

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