Far Eastern Economic Review
Issue cover-dated September 16, 2004
Despite continued fears of terrorist attacks and a muddled, inconsistent approach to legal and economic reform, Indonesia is attracting regional investment flows, especially from Singaporean and Malaysian companies
By Michael Vatikiotis/KUALA LUMPUR and John McBeth/JAKARTA
WHEN INDONESIAN presidential candidate Susilo Bambang Yudhoyono flew to Kuala Lumpur for a day in early August, Malaysian corporate moguls flocked to see him. Among them was commodities-and-property tycoon Robert Kuok, who got on a flight from Hong Kong to meet the country's prospective next president. Unusual as it may seem for an Indonesian presidential candidate to head for a neighbouring country in the midst of a closely fought campaign, the visit underscores the importance that regional capital is playing in Indonesia as it struggles to recover from more than six years of economic stagnation and political uncertainty.
Despite continued fears and warnings of terrorist attacks and a muddled, inconsistent approach to legal and economic reform, confidence in Indonesia is slowly returning by way of Malaysian and Singaporean companies, mostly state-backed or state-owned institutions, which have been at the forefront of direct investment in Indonesia in recent years. Direct investment from both countries has steadily increased since 1999--in the case of Singapore the value of FDI doubled in 1998-2002.
They have moved into banks, oil-palm plantations and telecoms companies--and almost without exception have seen improved performance in the assets they acquired. Recognition of this success, in spite of continuing political and legal risks, is helping to revive interest in an economy that has been starved of capital since the economic crisis of 1997.
"These investments have been good for both sides," says Philip Lee, CEO of JPMorgan's investment bank in Southeast Asia. "They have brought value in the form of capital and expertise--and they also engender enthusiasm for Indonesia." Lee is bullish on Indonesia as it heads into the final round of a presidential election that has defied expectations of violence and chaos. He expects to see an upsurge in direct investment after a new government is formed in October. Among the healthy signs Lee cites: In March JPMorgan successfully helped Indonesia float a $1 billion sovereign bond for the first time in nearly a decade; domestic companies are starting to appear on regional road shows; and regional bankers are starting to appear interested in lending to them again.
To be sure, this is a far cry from the investment frenzy of the mid-1990s in Indonesia. Portfolio investors are still only nibbling at the country's lively stockmarket and a great many international investors remain wary of the country's unpredictable legal system and fret about ineffective reform policies. But the appetite for direct investment, especially from the region, is growing nonetheless. The trend is starkly illustrated by that fact that no less than two Malaysian banks and one from Singapore are among five consortiums shortlisted to bid for a 51% stake in Bank Permata, Indonesia's seventh-largest financial institution in terms of assets, which will be sold off in November.
Most analysts give the inside track to Britain's Standard Chartered Bank and Astra International, Indonesia's leading car maker, which is partly owned by Jardine Matheson's Cycle & Carriage in Singapore. But a consortium that combines Malayan Banking (Maybank) and Indonesia's state pension-fund operator PT Jamsostek is also considered to have a real chance because of parliamentary concern over the country losing yet another bank to mostly foreign interests.
Two other approved bidders are Malaysia's Commerce Asset-Holding, in partnership with locally owned Bank Bumiputera, and Singapore's United Overseas Bank (UOB), which only recently bought a 23% stake in Bank Buana, the country's 11th-biggest bank in terms of assets.
Among the regional institutions already invested in Indonesia are Temasek Holdings, the Singapore government's investment arm, which has bought into two Indonesian banks. Shrewd corporate players like Malaysia's former Finance Minister Daim Zainuddin and Ananda Krishnan have been very active in Indonesia, and a blue-chip Malaysian Chinese group, YTL Corp., has made a foray into the power sector.
While these moves anticipate economic and political stability after the September 20 presidential election, they also speak to the growth constraints of Malaysian and Singaporean firms in their home markets. Malaysia's economy is steaming along with growth this year forecast as high as 8% compared to Indonesia's projected 4%, but its companies need more room to grow. "They have to go overseas. They have to find markets. The logical place is Indonesia. The assets are affordable and the potential growth is substantial," says Karim Raslan, a corporate lawyer and commentator in Kuala Lumpur.
Singapore companies are cash-rich and desperate to invest overseas. The advantage of Indonesia is that it is close by and there are deep cultural and historical ties that a new period of stability promises to revive. "It is a market that Singapore businessmen understand relatively well, due to the long-standing social and business links between the communities of both countries," says Tony Chew, a private businessman who is chairman of Network Indonesia, a 350-member group that aims to cultivate a fraternity of Singapore-based companies and entrepreneurs interested in business opportunities in Indonesia.
"There's a conscious desire to conglomerate," says Nazir Razak, CEO and managing director of Malaysian investment bank CIMB, part of the Commerce Asset-Holding group that already owns a stake in Indonesia's Bank Niaga and is on the shortlist of bidders for Permata. "We have to help each other in the region to create a larger common market for goods and services. It's the only way to compete with China."
From Indonesia's standpoint, the influx of regional capital from across the Strait of Malacca fills a void left when large institutional and corporate investors fled the country after the economic crisis and the onset of five years of political uncertainty following the fall of Suharto in 1998. The strong undercurrent of nationalism that stymied deals with major Western institutions in the recent past is tempered by the greater degree of comfort Indonesians have with their neighbours.
"Companies from Singapore and Malaysia are more clean and professional," says Felia Salim, an experienced professional banker in Jakarta. When Singapore's Temasek took over Bank Danamon, for example, the new management team included experienced ex-Citibank executives like Francis Rozario.
One significant surprise has been Malaysian power and construction conglomerate YTL Corp.'s bid for Java Power, part of a coal-fired complex in East Java. YTL Group Managing Director Francis Yeoh has won praise for steering clear of risky ventures in China and the region and investing in solid utilities in Britain and Australia. But the return on these investments has been slow in coming, and though the company would not comment on the prospective deal, YTL is reportedly looking for assets with a faster turnover.
YTL's timing is good, says a foreign consultant with another major power company, who did not wish to be named. "There are not too many competitors from traditional Western sources in the power sector," he says. "It's easier for the Asian money to come in--they look at the risks differently."
A Malaysian Chinese like Yeoh venturing into Indonesia, where there has long been a history of anti-Chinese sentiment, could be seen as a boost for investor confidence. Along with other private companies like Penang-based Oriental Holdings, which recently announced a $6.5 million investment in a car-parts-assembly plant, YTL's bid suggests that private companies in Malaysia, and not just state-owned concerns, are starting to make forays into Indonesia.
The advantage for Indonesia is the demonstration effect. Cycle & Carriage was heavily criticized for buying into Indonesian car maker Astra in the middle of the financial crisis, but now that investment is beginning to pay off in ways that Singaporean investments in China, in particular, are not. Astra recently announced that record sales could help raise before-tax profits by 15%-20% this year from 3.4 trillion rupiah ($365 million) in 2003. Bolstered by historically low interest rates, car and motorcycle sales are growing 34% and 42% respectively year on year.
It's a similar story in telecoms. Temasek's Singtel has a 35% stake in Indonesia's largest mobile-phone operator, Telkomsel, which grew its subscriber base by 60% in 2003 over the previous year. Another Temasek subsidiary, ST Telemedia, has a 41% stake in Indosat, the country's second-largest cellular operator. Indosat's business gained more than 1.3 million subscribers and showed a 30% increase in revenue for the first half of 2004, according to the company.
ST Telemedia sees Indosat as a company with promising growth opportunities. "With Indonesia's huge telecoms market and the company's strong market position as an integrated, wireless-focused network-and-service provider, Indosat is an integral part of ST Telemedia's vision of becoming a significant wireless and global IP communications company," Lee Theng Kiat, president and CEO of ST Telemedia told the REVIEW in response to a written query.
The banks have done well, too. Bank Danamon, Indonesia's fifth-largest bank, now controlled by Temasek, reported a quarterly jump in net profits of 597 billion rupiah against reported earnings of 345 billion rupiah last year. Bank Internasional Indonesia, which was taken over last year by a foreign consortium in which Temasek owns a 50% stake, saw net profit increase to 425.1 billion rupiah in the first half of 2004 from 145.7 billion rupiah the year before.
But despite all the help from the neighbourhood, nationalist sentiment lingers and some Indonesians continue to carp. Direct investment from the region is mostly in areas already restructured and where domestic consumer demand is strong--it's not the kind of greenfield investment that will drive up exports, stimulate economic growth and create jobs.
Beggars can't be choosers, though, and the advantage of regional capital is that it is less flighty than international capital, points out Philip Lee. Malaysians like Musa Hitam, the chairman of Kumpulan Guthrie, which has acquired 53 oil-palm estates and 14 palm-oil mills across Indonesia in the past two years, want to convince Indonesians that they are interested in a long-term relationship, not just a quick profit.
Ultimately, cultural affinity and the logic of regional agglomeration won't overcome what remains the largest obstacle to any investment in Indonesia, which is the country's arcane and uncertain legal system. "Understanding their business culture is a real challenge," agrees Musa Hitam, who is organizing special seminars on Indonesian company law at Guthrie. "In some ways, Indonesia is still foreign to us and we cannot take things for granted there." There's also a danger that if a new government in October does trigger a flood of new investment, it may feel less compelled to fix the country's legal problems.
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