Joko Widodo made a remarkable decision a few weeks after taking office as president of Indonesia. In mid-November, he increased the price of fuel, which is subsidised by the government, by 31 per cent, which would save the government US$8 billion a year. He went even further at the end of 2014, capping the diesel subsidy and scrapping the petrol subsidy entirely. It was a decisive announcement of intent by the former mayor of Surakarta and governor of Jakarta, popularly known as Jokowi, and the markets were impressed. By the end of the year, the Jakarta Stock Exchange Composite Index had surged 22.3 per cent, posting its biggest gain since 2010.
The money formerly destined to subsidise fuel prices “can now be used to build schools for the young, hospitals for the old, rather than being burned in the engines of cars idling in traffic jams,” as Wellian Wiranto, economist at OCBC Bank in Singapore, points out. The subsidies, if they had continued, would have accounted for more than 13 per cent of government spending in 2015, but they’ve been whittled down to 1 per cent. The savings will be channelled into infrastructure development and assistance programmes that should bolster private consumption.
So although sentiment has deteriorated towards emerging markets in general as asset managers have shifted allocations to the US, whose economy and currency continue to strengthen, Indonesia should retain its appeal this year. JP Morgan expects the country’s economy to expand by 6 per cent in 2015, and says lower oil prices will narrow the current account deficit. The firm’s favoured sectors are banking, which serves as a proxy for economic growth, cement, which will benefit from infrastructure spending, and property, which should enjoy lower interest rates later in the year.
The credit rating agencies remain supportive, too. Standard & Poor’s credit analyst Xavier Jean notes that the largest Indonesian companies have more prudent balance sheets than those in Singapore, Thailand and the Philippines, for example. His research shows that 13 out of 15 Indonesian companies reviewed have “moderate to low debt, steady cash flows from operations, manageable capital spending and large cash balances, which are consistent with characteristics of investment-grade companies.” These include Indocement Tunggal Prakarsa (cement), Semen Indonesia (cement), Kalbe Farma (pharmaceuticals), Perusahaan Gas Negara (gas) and Telekomunikasi Indonesia (telecoms).
Declining global oil prices are also likely to reduce operational costs for some sectors and translate into higher profits. The brokerage CLSA is bullish about the national airline, Garuda, shipping companies such as Berlian Laju Tanker, Pelayaran Tempuran Emas and Samudera Shipping, mining contractors such as United Tractors, and tyre manufacturers Gajah Tunggal and Multistrada Arah Sarana, which will benefit from weaker rubber prices.
The Jakarta Stock Exchange Composite Index surged 22.3 per cent last year, posting its biggest gain since 2010
Among the banks, CLSA favours Bank Rakyat and Bank Negara because they have room to generate more fee income (rather than rely on interest income) and have a “reasonable valuation,” and its infrastructure picks include Indocement and Jasa Marga.
However, it is hard to underestimate the importance of maintaining the reform momentum begun by Widodo’s confident move on the fuel subsidy. It is important that the released cash is directed to improving the country’s often overstretched infrastructure. Gridlocked roads, power brownouts and inadequate ports make it tough for factories to operate and deliver their products to markets. The president has ambitious plans to build and modernise key infrastructure such as railways, transport hubs and seaports, construct 2,000 kilometres of new roads and form industrial centres outside Java.
The reforms won’t be easy to implement. Widodo has to manoeuvre his way through a legislature controlled by an alliance of opposition parties and placate vested interests in regional and local governments. He has also promised to address corruption and bureaucratic inefficiency, which are two of the top five complaints about doing business in Indonesia, according to the Global Competitiveness Index.
Daily reports of spectacular graft at all levels of government repel foreign businesses and investors, who also have to grapple with opaque regulations and capricious laws. Government tenders are to be made more transparent by running them online, and legislation is likely to be enacted to improve the regulatory environment. Red tape should be cut through leaner government institutions and enhanced monitoring and supervision of public services, and there are plans to set up a “one-stop service for investment” and to cap the business licensing process at 15 days.
Clearly, governance reforms and improved infrastructure should boost economic growth and encourage foreign investment. Net foreign direct investment (FDI) and portfolio investment amounted to US$23.2 billion in 2013, according to official balance of payments data. The net inflow, at 2.7 per cent of nominal gross domestic product (GDP), was more than for any other Asian nation except China, notes Su Sian Lim, Asean economist at HSBC. In the first six months of 2014, net FDI and portfolio flows amounted to 2 per cent of GDP, up almost 14 per cent compared with the same period a year earlier, while portfolio flows tripled to 4.1 per cent of GDP, spurred by renewed optimism in Indonesia’s potential. Again, these numbers are the strongest in the region.
Several world-class firms have announced plans to invest in Indonesia or to build new production facilities. These include Samsung Electronics, Mitsubishi Motors, Taiwan’s Foxconn, Germany’s VW and Philippine fast- food chain Jollibee. Private equity groups such as KKR, TPG and Carlyle are also making investments.
Meanwhile, investment in the country’s biggest conglomerates—Astra, Salim, Lippo and Sinar Mas—which have interests in all sectors of the Indonesian economy, is an easy way for portfolio investors to gain exposure to the nation’s development. The country has enormous promise for investors. It benefits from low labour costs, youthful demographics, with the proportion of working-age adults rising until 2030, a growing consumer class and vast natural resources. It also seems that it now has a president who is determined to ensure the nation’s potential isn’t wasted.