Indonesia: It’s all about the infrastructure

1 Jun

CFO of Bank Danamon, Vera Eve Lim, was today interviewed by Eric Bellman, the Jakarta correspondent for the Wall Street Journal. Bank Danamon is one of Indonesia’s largest banks by assets. She emphasized that infrastructure is “what keeps her up at night”. As I have said time and time again, the dire need for infrastructure will be a brake on future growth.

Lim commented that the underinvestment in infrastructure will result in Indonesia economically evolving into a case similar to India. That is, inflation will persist above targets, and, GDP growth will slow. The government of Indonesia, can continue to subsidize fuel, but it will all be in vain if the economy cannot grow because it is too expensive to move goods and services around the country. The central bank’s priority of managing inflation is weakened by the infrastructure impact on costs. As I have previously written, the governor of Bank Indonesia, Darmin Nasution was quick to emphasize such at his recent dialogue at the Consulate-General of New York.

Lim is not alone amongst experts in seeing this risk. Bellman and his colleagues at the WSJ’s blog, SoutheastAsiaRealtime, also wrote today of the increasing consensus the government is following the India path. This they say is reflected in the recent weak performance of the Indonesia Stock Exchange and the Indonesian Rupiah in international currency markets.

While I remain bullish on Indonesia, I am concerned that heading towards the election cycle, the government and the legislature will play more politics and theatre than good policy. With Europe grinding to a halt, Jakarta has a choice before her- sit and rest, or, push harder than ever to ensure the economy has the capacity to grwo.

 

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Wanted: Buyer for failing mobile company (Blackberry) with great potential in Indonesia

30 May

The situation for Research in Motion (RIM), the maker of Blackberry, continues to be deteriorate. With continued departures of senior executives, and, expected losses in coming quarters, the options for the business are getting limited. JP Morgan has been retained by the board to assist with strategic options.

Indonesia continues its passion for Blackberry. It was only a couple of months ago that riots occurred in Jakarta over the new release of a phone model. The government of Indonesia and in particular Minister of Trade, Pak Gita Wirjawan has courted RIM to invest in Indonesia. I recently met a friend to discuss my impending extended trip to Jakarta. She advised me, that while my passion for Apples iMessage was all well and good, I cannot survive in Jakarta without a Blackberry and a Blackberry PIN for the Blackberry Messenger System.

RIM’s misfortune could be a interesting opportunity for one of the aggressive competitors out there. The smartphone is the primary internet device for millions of Indonesians. Could a Facebook or Google have the gumption to take over RIM? Would RIM help an ailing Nokia, transform its position. What about Microsoft? What does Samsung think or care about this?

Clearly the question with RIM and Indonesia, is not just about selling more handsets, but how can acquiring create this primary internet device, lead to expanded revenue opportunities? Surely one f these companies wants a share of this lucrative potential market in Indonesia? We’ll have to wait and see.

 

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Indonesia: KRI Dewaruci visits New York

29 May

This week in New York it has been Fleet Week. Fleet Week is a tradition where active ships of the US Navy and Coast Guard will visit a city for a week. In New York, it was over this Memorial Day long weekend, and in conjunction with the celebration for the bicentenary of the Battle of 1812.

Usually addition to American ships, there are ships from other navies joining the festivities. This year Indonesia was represented by the tall ship the KRI Dewaruci.

KRI Dewaruci docked in Staten Island

This ship holds a very special significance for my family. My grandfather’s brother, Kapten Oentoro Koesmardjo, gave the Dewaruci her name. He was tasked by Indonesia’s first President, Sukarno, with heading to Germany and overseeing the final completion and delivery of this ship. Eyang Oentoro was the senior Indonesian born officer who accompanied the German born mariner, Captain Rosenow, in taking delivery of the Barquentine from the shipbuilders and sailing it home to Indonesia. A little know historical fact is Kapten Oentoro, on this same journey to Germany would meet and fall in love with his future wife Evy- the daughter of Captain Rosenow.

As a boy who grew up on the water and around boats, I thought the Dewaruci looked in good shape for a ship they first started building before World War II and delivered in the early 1950′s. This will probably be her last circumnavigation cruise. The Indonesian navy currently has plans for one or two more overseas goodwill missions with the Dewaruci before retiring her in the next year or so.

She will, if all goes according to plan, be replaced by a new tall training ship, and happily for our family, be renamed the Dewaruci.

More photos from the visit to be posted

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Indonesia: Jakarta No.2 in Facebook city rankings

23 May

Facebook and Indonesia are a known match made in heaven. I have written before about how Indonesia is No. 4 in country rankings for Facebook users. Social analytics firm Socialbakers, has just come out with a city rankings and Jakarta (7,434,580) has been just pipped at the post for No.1 city by fellow Asian mega city, Bangkok (8,682,940).  What interesting is the measurement for this statistic as Bangkok has a penetration of 104.74 percent versus Jakarta with a penetration of 34.1 percent. In my reckoning Jakarta is virtually tied. The next largest Indonesian city on the list is Tangerang (1,043,680), which forms part of the greater Jakarta conurbation.

Facebook has been the subject of constant debate in justifying the valuation, pre-IPO and now in the last two days in the actual share price performance. So I am going to dive also. Any good finance student knows that discounted expected future cashflows are one of the measures of a company’s worth today. For Facebook, this ties back to its primary revenue driver and the size of its total user base.

Markets like Indonesia today, while massive in terms of users, offer little in the way of value given the much lower GDP per capita. Now while GDP is expected to grow significantly in Indonesia, another factor counts against Facebook creating value from Indonesia- Mobile. Most Indonesian Facebook users are accessing via mobile phones. Facebook has a weak side in its mobile execution to date. It took them forever to create an iPad let alone create a means to generate revenues from the phones of millions Indonesians.

Zuck has proven folks wrong before, so let’s wait and see.

Here is the link to the Socialbakers data.

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Tanjung Priok: Jakarta’s port – where the past and future are colliding

21 May

Indonesia’s history is naturally tied to it’s harbors and ports. Indonesia owes it economic success, national unity and Muslim majority to the sea.

A battle of wills is occurring in Jakarta’s port of Tanjung Priok (often shortened to ‘Priok’) between the economic demands of modern Indonesia and the historic legacy of  Indonesia. Tucked in a corner of the Tanjung Priok is a mosque housing the grave site of Mbah Priok, a cleric missionary who was key in bringing Islam to west Java.

Hutchinson Whampoa, the Hong Kong global port operator founded by Li Ka-Shing, has for over a decade been a primary private operator at Priok in partnership with state-owned operator, Pelindo. Hutchinson is undertaking a $100 million development to expand the capacity of the container terminal at Priok. This plan calls for the development of an area of 34 hectares but intersects with 5.4 hectares claimed by the descendants of Mbah Priok. While the grave site and mosque is around 320 square meters, the descendants of Mbah Priok, hold a property deed issued by the Dutch in the 1930′s for 54,000 square meters. Mbah Priok’s remains were moved to a public cemetery in 1997.

The Hutchinson operated Jakarta International Container Terminal currently handles around 2 million TEU’s (Twenty foot equivalent units – the primary container measure) plus with the other adjoining terminals, Priok in total handles 5 million TEU’s. This compares to 20 million TEU’s handled by the Port of Singapore. For a archipelago nation and as the primary port for the most populous island, Java, this is clearly insufficient. Singapore over the last decade has increasingly handled transshipment traffic as traffic is loaded on to smaller ships headed for Indonesia.

As most foreign investors to Indonesia understand, relying on the local courts and judicial system is undertaken at your own risk. In this case the government is the co-operator with the foreign firm, against local parties, with significant emotional and historical weight on their side. The courts have already ruled in favor of the government in a suit brought by the Mbah Priok descendants in 2002. In April 2010, the area exploded in violent riots between local Muslim residents and the north Jakarta police.

Given this previous ruling and the weakness with courts, the issue is now back with Pelindo and the national government. How Jakarta peacefully resolves this issue will be an interesting case study for how the country balances its past with its future.

 

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Indonesia: Darmin Nasution, the central banker of Indonesia

21 May

The New York representative office of Indonesia’s central bank, Bank Indonesia, held a briefing on May 10th 2012 at the Consulate-General of Indonesia New York, for a small invited group. This meeting was an opportunity for Governor Pak Darmin to brief us on the state of policy management of inflation and growth; and thoughts on the state of the banking industry. Pak Darmin is a French educated economist who ascended to the top job after his predecessor Pak Boediono, became Indonesia’s Vice President.

Bank Indonesia has an important role in Indonesia. While the democratically elected government focuses on delivering sustained growth and improving the welfare of the citizens, the central bank has to reduce the risk of inflation; help manage the currency; manage inward and outward capital flows so as to reduce volatility; and help manage the money supply. In addition Bank Indonesia has an important role in shaping policy for the banking industry. Given the importance of financial services in a developing economy, the central bank ensures that the system works for, and is accessible by the citizens of Indonesia.

The primary points Pak Darmin initially outlined were somewhat surprising. Given the Governors focus is monetary policy, he immediately spoke of macro factors which impact the governments fiscal position. He was praising in Indonesia’s ability to survive the current global economic stress but was quick to point out that while Indonesia enjoys an incredibly low public debt to GDP ratio of 30 percent, this has been at the expense of infrastructure investment. It is this issue of underinvestment to date which he believes represents the key risk to growth going forward.

In terms of the overall position of Indonesia in the region, he emphasized that while inflation was slightly higher than neighbors, the country had a healthy economy that had survived the global instability. This is reflected in the state of the banking industry in Indonesia which has relatively low level of non-performing loans and a reducing interest rate spread between deposit rates and lending rates.

The outlined growth plans for the nation and the current industrial structure, are causing import growth to rise faster and therefore impact the current account. The governor acknowledged this as a price of growth and believes the government long range plans for industry and infrastructure will aim at these issues. The Bank will ensure the growth of the money supply is at a rate appropriate.

The fuel subsidy as well as the international oil price remain points of concern for Indonesia. This is a key linkage which is connected to the infrastructure question over the longer term and impacts the Bank’s control of inflation in the short term and interest rates.

Indonesia has interesting times ahead and it was reassuring the head of the central bank is positive and confident about the macro management going forward.

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Indonesia: S&P still holding back on pushing to investment grade

18 May

Standard & Poor’s released a report on Indonesia yesterday (it is a follow-up from their decision on April 23rd to hold the rating) and highlighted that while foreign direct investment is surging there are still constraints such as corporate governance, red tape, legal & regulatory environment, and corruption. The S&P analysts are playing it awfully safe these days and I am sure knowledgable investors will continue to plow portfolio flows and FDI into the country if Jakarta maintains the successful macroeconomic management.

In all seriousness, the point they make is Indonesia has got it right to date, and, they should not lose the reform momentum. S&P have also got it right that, for all its promise, Indonesia remains a challenging market to operate. While corruption may have shape shifted given the government corruption busting commission, the KPK, it remains.

You need to select your local partner wisely and establish relationships after adequate research and diligence. As the race to invest continues, the urgency to get this partner question right only increases.

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