Malaysians Love Indonesia

Reforms have made the country an attractive destination for investors.
Malaysian have been investing in a big way in Indonesia for more than a few years already. Here are some facts that you may find interesting:
- Malaysian companies such as Sime Darby Bhd, IOI Corp Bhd, Kuala Lumpur Kepong Bhd (KLK) and Genting Plantations Bhd have about 602,000ha of oil palm plantations in Indonesia (Indonesia has about 6.7 million ha of plantations compared with Malaysia’s 4.4 million ha);
- Axiata Bhd’s XL Axiata is now the joint second largest telco in Indonesia (after Telkomsel and joint second with Indosat, in a country with 162 million subscribers and less than 60% penetration rate);
- CIMB Group Holdings Bhd’s PT Bank CIMB Niaga Tbk is the fifth largest commercial bank and second largest mortgage lender in Indonesia; CIMB Niaga currently contributes 20% of CIMB group’s profit and will likely contribute up to 40% by 2015 according to CIMB group chief executive Datuk Seri Nazir Razak; and
- Total Malaysian investment in Indonesia (2004-2009) stood at US$2.1bil; total foreign direct investment flow into Indonesia for the same period was US$36.6bil.
In 2005, when my firm started to research Indonesia’s equities, there were quite a few businessmen who were skeptical and doubtful about investing there, perhaps from years of negative perception.
Today, that perception has changed. There are many Malaysian businessmen going to Jakarta and other Indonesian cities for the first time, impressed with the country’s vibrancy and prosperity.
More importantly, many investors find that there are plenty of commercial opportunities available. Indonesia has been able to attract investors from the US, Europe, Australia and Asia after reforms were put in place over the last three years.
In the last decade or so, Indonesia has opened up many sectors of the economy to foreign investors such as up to 99% ownership in banking, oil and gas, toll roads, water, agriculture, power generation and many other sectors. Some recent incentives include allowing foreign investors to own 67% in hospitals and 49% in plantations for staple food.
How did it get so good, so fast?
Changes in perception take time. But once momentum is built, confidence breeds more confidence. Indonesia’s reforms, which started after the Asian financial crisis in 1997/98, went through many periods of uncertainty and skepticism.
I guess a string of successful political and economic reforms after President Susilo Bambang Yudhoyono took office helped the country gain positive international perception. First, Susilo’s government was lauded by investors for cutting fuel subsidies during the peak of the crude oil price spike in 2008 (Susilo’s government managed the politically/socially sensitive issue wisely by giving cash rebates to millions of Indonesia’s poor).
Second, Indonesia weathered the 2008/2009 global financial crisis well. It was one of the few countries which posted positive gross domestic product (GDP) growth (4.5% growth in 2009) despite the challenging period.
And finally, the big re-election victory of Susilo in 2009 and the subsequent appointment of technocrats to the cabinet reinforced political stability in Indonesia; this was a big draw to many global investors.
Another key to Indonesia’s success is its social stability – a very important factor for an emerging economy – to deal with unemployment, poverty, affordability (i.e. inflation).
Under Susilo’s leadership, Indonesia has charted steady economic growth (average annual GDP growth rate for Indonesia is 5.6% per annum in the last five years) supported by rising private consumption (which accounts for 58% of GDP); increasing consumer purchasing power is fueling demand for cars, motorcycles and mobile phones.
What’s in store for the future?
Indonesia’s rising domestic demand and supportive commodity prices and exports to China will likely ensure a sustainable economy.
Political stability will ensure a conducive environment for businesses and investment, and continuing structural reforms will be the catalyst for more growth opportunities.
Four to five years ago, there was a lot of hype on Indonesia’s infrastructure spending but much of the proposed spending was stuck due to land reform problems.
Susilo has pledged to double spending on roads, seaports and airports to US$140bil over the next five years, to help deliver average GDP growth of 6.6% over the remainder of his term ending in 2014, according to a May Bloomberg report. Inflation in Indonesia remains well under control at below 4%. Therefore, there is room for interest rates to remain at current low levels of 6.5% (Bank Indonesia rate).
I believe low inflation rate expectations and rising investor confidence mean a stronger rupiah. We expect the rupiah to be one of the fastest appreciating Asian currencies in the next three years.
Performance of the Indonesian stock market is also reflective of good progress and potential of the economy. The Jakarta Stock Market Index over the last three, five and 10 years has performed comparable to or better than many other emerging stock markets like Brazil, Russia, India and China.
However, from our past few years of investing in Indonesian equities, not all is smooth sailing. While it may not be easy to do business in a different country like Indonesia (there are many obstacles, expected and unexpected), there are also many opportunities available for entrepreneurs, if one is fully committed.
Like any venture, there are risks and success is not assured. For example, satellite TV operator Astro All Asia Networks plc foray into Indonesia via a joint venture with Lippo Group was not very successful. However, there are plenty of success stories from companies like CIMB, XL Axiata, KLK and so forth.
It is a mistake to assume that a business model which works well in one country will work well in another. One of my earlier stock picks in Indonesia did not do well because I assumed the company would perform similarly to my success story in Malaysia.
I should highlight that one should spend time to understand Indonesia and in particular, the local culture. One needs to work hard to find a win-win situation among the many opportunities in Indonesia. The growth of Indonesia’s economy will create many business opportunities for its trading partners, especially neighbouring countries.
I was in Guangzhou, China, recently for a gathering of business people from Hong Kong, Shenzhen and Guangzhou, and happened to mention that the Malaysian Chinese Chamber of Commerce would be organising a conference on doing business in Indonesia in July.
I was surprised by the strong interest and enthusiasm shown by many of the Chinese businessmen, who were keen to explore business opportunities in Indonesia.
To investors who have not been to Indonesia for a long while, hop on a plane and go have a look at Jakarta. It will be the start of a journey of positive changes to your perception of Indonesia.
by Teoh Kok Lin. The writer is the founder and chief investment officer of Singular Asset Management Sdn Bhd.