The Investment Case for Indonesia the Investment Case for Indonesia
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THE INVESTMENT CASE FOR INDONESIA THE INVESTMENT CASE FOR INDONESIA Figure 5 Stock Market Profi le 2003 2004 2005 2006 2007 Listed companies 333 331 336 344 383 Top priority since Indonesia’s economy has always operated Long perspective Listed shares (bil.) 829.3 656.4 713.0 924.5 1,128.2 with a heavy state infl uence. One of Indonesia’s top priorities in recent years Volume of net share 9,524 23,946 27,938 25,451 38,170 As solid as Indonesia’s recovery has been, it may be has been to increase foreign direct investment as a purchases by foreign To that end, the government has begun to reduce slowed if the current crisis produces a prolonged investors (mil.) means of promoting its recovery and development. its long-standing subsidies of key basic goods, slump in global growth. Moreover, the country con- Market capitalization 54.5 72.7 81.4 138.4 211.1 Many sectors of its economy have been open to ($ bil.) such as fuel and rice, and is overhauling the vast tinues to face a long list of challenges in restructur- foreign investment for decades, and these infl ows Source: Indonesia Stock Exchange state-owned enterprise sector—which at its zenith ing its economy and raising its living standards, and have played a key role in recapitalizing its banking was made up of 200-plus companies. The goal is to it remains to be seen if Indonesia has the fortitude system—which is now 40% foreign-owned.3 But in reduce that number to 50 by consolidating, selling to sustain the policies that will enable it to achieve the post-crisis era, Indonesia’s investment needs are or privatizing these enterprises. Industry deregula- greater development. tion is also under way.9 In the oil and gas sector, greater than ever, and the government is actively Given its progress to date, however, Indonesia may for example, deregulation has reduced the role of seeking foreign capital to, in particular: enhance warrant consideration by investors who are seeking Pertamina, the state-owned oil company, and opened the country’s infrastructure, which is vastly potentially attractive returns and are willing to ac- The Investment both the upstream and downstream markets to inadequate and exerts a drag on economic growth; cept high levels of volatility and the potential for sig- private companies.10 expand the oil and gas sector’s production and re- nifi cant capital loss. Moreover, the Indonesian stock fi ning capacity; sharpen the competitive edge of ex- government passed a landmark investment law Capital market reform has also been an area of market has historically had one of Southeast Asia’s Case for Indonesia isting export industries and develop new ones, like in 2007 that secures the rights of foreigners and focus. In 2007, Indonesia’s two stock markets were lowest correlations with the developed markets, and pharmaceuticals; and build key domestic industries streamlines the investment process. It also passed merged to form the Indonesia Stock Exchange (IDX), as such may potentially offer diversifi cation benefi ts. 5,8 such as transportation and telecommunications. tax reform that strengthens taxpayers’ rights and with the goal of creating an effi cient centralized One big hurdle to progress here has been an invis- reduces the scope for arbitrary decision making, exchange that is more attractive to domestic and ible but well known one: a legal, regulatory and and has taken steps to better safeguard investors’ international investors.6 Trading systems have tax environment that is arbitrary, non-transparent intellectual property rights. Many more actions of been updated to better accommodate other types of References and biased against foreigners. To address this, the this type have been taken or are planned. securities, such as bonds and derivatives, and there 1 Indonesia Staff Reports and World Economic Outlook/ INVESTMENT OPPORTUNITY Data Base, International Monetary Fund, imf.org has been a drive to persuade companies to list on The net effect has been a dramatic increase in FDI 2 Indonesia Country Brief, World Bank, worldbank.org PORTFOLIO BENEFITS IDX. Although Indonesian companies have a long- infl ows, which jumped by 150% in 2007 to $40.1 3 Asian Development Outlook 2008, Asian Development standing preference for operating privately, a vari- billion [FIGURE 4].7 The manufacturing sector cap- Bank, adb.org tured two-thirds of that infl ow—with most of it going ety of special listing incentives, such as tax breaks, 4 Country Business Intelligence Reports: Indonesia, into chemicals, pharmaceuticals, paper and metal have met with some success and the exchange has Oxford Business Group, oxfordbusinessgroup.com grown [FIGURE 5].6,9 The Indonesian market sharply 5 Indonesia Bouncing Back, Business Week, 2008, products—followed by the transportation, construc- businessweek.com tion and agriculture.7 About one-third of this money declined in 2008 along with the rest of the global 6 IDX Fact Book 2008, Indonesia Stock Exchange, idx.co.id came from the U.S., while another third came from markets, and that may slow its development, but its Figure 4 Approved Foreign Direct Investment growth prospects remain good. 7 2007 Economic Report on Indonesia, Bank of Indonesia, Asia—most notably, Singapore and Malaysia.7 In bi.go.id 45 2008, infl ows into oil and gas and the mineral sec- In recent years, Indonesia has implemented many 8 Investor Friendly Indonesia, International Media Unit, 40 tor, particularly coal, have accelerated—no doubt other changes that have strengthened its economic 2008, telegraph.co.uk 35 partly in response to the rising commodity prices foundations—including improved capital standards 9 Indonesia Country Briefi ng 2008, The Economist, 30 economist.com that prevailed until mid-year.9 for and oversight of its banks, reform of its bank- 25 10 Petroleum Report Indonesia, U.S. Embassy ruptcy code and corporate governance and account- 20 Jakarta, usembassyjakarta.org Smaller government ing standards, and further liberalization of its trade $ BILLIONS 15 Yet another post-crisis priority has been to reduce policies. It has also launched an aggressive and high 10 the role that the government plays in the economy, profi le campaign against its rampant corruption that Van Eck Securities Corporation, Distributor 5 335 Madison Avenue, New York, NY 10017 both to contain spending and promote effi ciency independent observers believe is increasingly mak- 0 vaneck.com | 1.888.MKT.VCTR 9 2002 2003 2004 2005 2006 2007 and competitiveness. This is a large, ongoing task ing an impact. Source: Bank of Indonesia IDXIC ( 01/09) THE INVESTMENT CASE FOR INDONESIA THE INVESTMENT CASE FOR INDONESIA Figure 2 Selected Economic Indicators 2003 2004 2005 2006 2007 Resurgent Indonesia Government debt/GDP (%) 61.2 56.7 47.5 39.0 35.3 Favorable Factors “ Indonesia has made a Debt/asset ratio for 41.2 41.0 37.5 35.1 31.5 The investment case for Indonesia begins with the nonfi nancial companies (%) Indonesia’s prospects are further bolstered by a remarkable recovery remarkable recovery it has made from the economic Infl ation rate (%) 6.8 6.1 10.5 13.1 6.4 powerful set of positive fundamentals—namely: from the Asian economic crisis that beset Southeast Asia in the late 1990s, 19.6 21.4 22.5 21.7 22.4 Private investment/GDP (%) OIL AND GAS WEALTH: The hydrocarbon sector triggered in part by excessive borrowing and asset crisis of the late 1990s.” Trade balance ($ bil.) 24.6 20.2 17.5 29.7 33.1 accounts for 25% of Indonesia’s GDP and 40-50% of price bubbles throughout the region. Indonesia Int’l reserves ($ bil.) 336.3 36.3 34.7 42.6 56.9 its government revenues.7 It is one of the world’s was particularly hard hit, enduring a collapse of its oldest oil producers and was among the fi rst currency, a meltdown in its banking and corporate and has growing ties with China and India, which Source: Asian Development Bank and Bank of Indonesia members of OPEC. Oil production has declined in sectors, and a severe economic retrenchment. In the have ranked among the world’s fastest growing na- recent years, however, refl ecting aging reserves and decade since, the country has righted itself by pur- tions in recent decades. diminished investment in this sector in the post- suing sound fi scal and monetary policies combined SHEER SIZE: With a population of 240 million, crisis era. Due to declining production combined with a broad agenda of reforms aimed at rebuilding, the fourth largest in the world, the country has a with rising domestic energy needs, Indonesia restructuring and revitalizing its economy— huge domestic market that is becoming increas- became a net importer of oil in 2003 and will for- the largest in Southeast Asia. ingly consumer-oriented as incomes rise. Private mally exit OPEC at the end of 2008. But it continues consumption now powers about half of GDP growth, A remarkable political transformation has taken to be a leading exporter of liquefi ed natural gas, more than any other single factor.1 place as well. In 1998, the upheaval associated with ranking second in the world to Qatar.5 the crisis forced the resignation of General Suharto, the country’s dictator of 32 years, and democracy MINERAL WEALTH: The country is one of the world’s top ten mineral producers, with signifi cant has taken a fi rm hold since then. Susilo Bambang deposits of gold, silver, copper, coal, tin, bauxite and Yudhoyono became Indonesia’s fi rst directly elected 3 Unless otherwise indicated, the statements in this report nickel. Its coal reserves are the third largest in the president in 2004, and has provided effective leader- 3 are the product of Van Eck Associates Corporation world and it is the leading exporter of tin.