IndonesiaIndonesia: one emerging market you can't afford to ignore
By Cris Sholto HeatonJul 13, 2009
When Susilo Bambang Yudhoyono first quit the Indonesian government in 2004 to run as president, voters saw him as the underdog. That image helped propel him to victory in the country's first fully democratic presidential election, beating his former boss Megawati Sukarnoputri in a run-off.
Today, SBY - as he's widely known - is no longer the outsider. But after five successful years in office, voters have lost none of their enthusiasm. Early counts suggest that last week's election was a convincing first round win for him, with more than twice as many votes as Megawati.
Markets took the news fairly calmly; the Jakarta composite closed up only 2.4% – very different to the 18% leap we saw in India when the Congress party won its decisive victory in May. That's largely because Yudhoyono's re-election was widely expected – anything else would have been a major shock.
But expected or not, the result is just as important as India's poll. This resounding mandate should ensure that one of Asia's most interesting and most overlooked stories stays well on track …
A strong recovery after the Asian crisis
While most of the emerging markets hype has focused on China and India, Indonesia has turned in a solid performance over the last five years as it recovered from the aftermath of the 1997-1998 Asian crisis. GDP per capita has grown at the second-fastest rate in the region, behind only China.
Long-term prospects are bright. Demographics are excellent; 44% of its population of 240 million is under 24, meaning a growing workforce in years to come. Basic literacy rates are at 90% (although education still needs a lot of investment and will hopefully be a government priority this term).
The country is resource-rich. It's a major exporter of soft commodities such as palm oil, cocoa and coffee, as well as coal. But it's not just a geared play on commodities. The economy is mostly driven by domestic demand, with consumption accounting for around 60% of GDP (see chart blelow).
And while many investors turned their backs on the country because of unpleasant memories of how everything fell apart ten years ago, the harsh lessons of the crisis seem to have been learned. Today, the economy is on a much sounder footing.
Back then, many overleveraged Indonesian companies were unable to repay foreign-currency loans after the rupiah plummeted, while the domestic banking system imploded and had to be nationalised. So it's no wonder that the focus this time was on cutting borrowing. Total public and private debt to GDP has fallen from over 100% in 2000 to 60% last year.
Indonesia's main problems are corruption – it ranks 126th on Transparency International's index - and bureaucracy. The last government has made some progress is tackling both, but improvements are slow, as is the tendency with such problems.
However, the signs are that things should move a little faster in the next few years. The strong showing of Yudhoyono's Partai Demokrat in the April parliamentary elections meant that he could drop his current vice-president Jusuf Kalla, leader of the Golkar party, from the presidential ticket and pick central bank governor Boediono as his running mate this time. Boediono is a well-regarded technocrat who isn't a member of any political party and his presence at the centre of government should help keep reform high on the agenda.
The market is still good value
Given Indonesia's potential, investors really can't afford to ignore it. And it looks like its steady performance throughout the last year is making people realise this. You may have noticed the cringe-inducing term 'Chindonesia' (adding Indonesia to China and India) cropping up a bit in the last few weeks; sadly for those of us who dislike hearing the English language mangled to produce witless buzzwords, we're likely to hear it a lot more of this.
Still, the attention will be welcome if it helps a new bull market get under way. The Jakarta Composite has bounced strongly from its October lows (see chart below). I'd be surprised if that pace holds up over the next few months. However, it looks good value on a forecast price/earnings ratio of 14 times earnings, so I think this is a fair entry point for long-term investors.
The easiest way to invest in a broad basket of stocks is via the US-listed Van Eck Market Vectors Indonesia ETF (US: IDX). This fund holds a fairly diverse basket of 25 large Indonesian stocks and has a gross expense ratio of 1.08% - that's higher than average for an exchange-traded fund, but understandable given that this is a niche product for now.
The only other dedicated fund that I know of is a closed-ended fund called the Indonesia Fund (US: IF), which is also US-listed. This is run by Credit Suisse, has a management fee of 1.62% and currently trades at a discount to net asset value of around 7.5%.
Alternatively, if you're looking to invest directly, it's worth running an eye over Telekomunikasi Indonesia (US:TLK), the country's largest telecoms group (and the biggest holding in both the aforementioned funds). Far from being a boring utility, telecoms are a key play on a country like Indonesia in two ways. Firstly, better communications infrastructure can play a major role in driving growth and development. Secondly, as consumer become richer, they purchase more high-end, high-margin content over their phones, such as mobile internet, music and video.
I first profiled Telkom in more detail back in September. Inevitably, the company has been hit by the global recession, which came on top of the recent price war in the Indonesian mobile market; first quarter operating income was down 20%.
But Telkom still looks very attractive, with strong cash flow and a solid balance sheet, in contrast to its more-pressured rivals. A shakeout in the Indonesia telecoms market is likely over the next year or so, with some smaller rivals having to merge or go out of business. This should bring an end to the price wars, which already seem to be running out of steam.
The stock has an American Depositary Receipt that trades in New York (US: TLK), which makes it easy for most investors to access (see chart below). Given that and its reasonable valuation – a p/e ratio of 16 times last year's depressed earnings and a dividend yield of around 5% – this would still be my first pick if you're looking to add an Indonesia play to your portfolio. But I'm also looking at a few other ideas and hope to be profiling one sometime soon.
In other news this week …