Sunday, 30 August 2009

Indonesia’s pull factor


DRIVEN by its strong domestic consumption, Indonesia has proved its economic resilience in the midst of a global slowdown after posting a relatively strong growth of 4% year-on-year (y-o-y) in the three months to June.

With a population of 226 million – the fourth largest in the world – Indonesia is increasingly being seen as an attractive investment destination by many foreign investors, including those from Malaysia.

In fact, Malaysian companies have become more active with their investments since the 1990s to tap the huge market opportunities that the country offers.

Among the sectors where Malaysian presence can be found are plantations, banking, telecommunications and infrastructure.

Cultivating growth

It is believed that about 50% of Indonesia’s oil palm plantations are controlled by Malaysian companies, including IJM Plantations Bhd, United Plantations Bhd, Asiatic Development Bhd, Sime Darby Bhd, Kuala Lumpur Kepong Bhd and IOI Corp Bhd.

Analysts opine that the limited agriculture land in Malaysia would continue to drive Malaysian planters to expand their plantation land bank.

Take IJM Plantations. Since last year, the company has been eyeing to acquire 40,000ha of oil palm estates to add to its existing land bank.

With 70% of its acquisition target met as at end-July, IJM Plantations is expected to complete its buying spree of oil palm estates there by the end of the year.

But expanding plantation land bank is not a smooth process, as foreign companies can be bogged down by costly land prices and bureaucratic red tape. In addition, companies also face the risks of “disruptive” changes in the terms and regulations set by authorities.

Singular Asset Management Sdn Bhd chief investment officer Teoh Kok Lin explains that such risks are a common problem in emerging economies like Indonesia.

But he says conditions have improved over the last five years, particularly under the current leadership that has been focusing on providing political stability and implementing sound economic policies to boost Indonesia’s economy.

Huge lure

Teoh commends the liberal policies practised by the Indonesian government for its banking system, such as allowing foreign equity ownership of up to 100%, as a huge draw to investors.

With banking penetration being just 33% of its GDP, the market offers tremendous medium- to long-term prospects for foreign bankers.

Among the Malaysian banks that have jumped on the Indonesian bandwagon are Bumiputra-Commerce Holdings Bhd (BCHB), through CIMB Niaga, and Malayan Banking Bhd (Maybank), through its controversial acquisition of PT Bank Internasional Indonesia (BII).

BCHB’s investment has been a fruitful venture, as CIMB Niaga accounted for 22% of the group’s pre-tax profit for the second quarter ended June, compared with 12% in the previous quarter. Contributions from its Indonesian operations are the main driver for its 2% y-o-y net profit growth to RM663.2mil for the quarter in review.

As for Maybank, it is targeting to break even on its investment in BII only by 2013. Maybank completed its acquisition of the bank at a whopping RM8.6bil in October last year.

In the telecommunications sector, Axiata Group Bhd and Maxis Communications Bhd have become active players in that market.

Axiata holds about 84% stake in Indonesia’s third-largest mobile phone operator, PT Excelcomindo Pratama Tbk, while Maxis owns 44% in PT Natrindo Telepon Seluler.

Going forward, Teoh believes that the pressing need for quality infrastructure there will make the construction sector the next attraction for Malaysian companies.

He sees emerging opportunities in the sector given the government focus in the area. In the Indonesian 2009 budget, US$7.5bil had been allocated for infrastructure spending and an additional US$703mil for labour intensive infrastructure projects in the country. —

To view a map/chart with this article please click on the link below.