Investing Opportunities in Indonesia
Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Indonesia may not be part of the famous BRIC countries, but the country certainly deserves some consideration from global investors looking for the best international opportunities. The biggest economy in South East Asia has more than 248 million habitants; it’s one of the fastest growing countries in the world and has an investment rate credit rating. Stock valuations are also quite compelling, so fundamentals look interesting for long term investors in Indonesian equities.
Economic growth and fiscal sustainability
2011 was a tough year for many countries, the Eurozone remained under siege from its financial crisis and countries like the US and Japan experienced unconvincing growth rates, even high growth emerging markets like China and Brazil had to face a slowdown do to an uncertain global economic environment.
Indonesia, on the other hand, reported a 6.5% increase in GDP for the year, its highest growth rate since 1996, and the country regained its investment grade status during a period in which many European countries saw their credit ratings questioned, and even the United States received a downgrade from Standard & Poors in August 2011.
The same credit rating agency which downgraded the US upgraded its assessment of Indonesian debt last year and was joined by Moody´s in January 2012. The statement from Moody´s reads:
Indonesia's cyclical resilience to large external shocks points to sustainably high trend growth over the medium term. A more favorable assessment of Indonesia's economic strength is underpinned by gains in investment spending, improved prospects for infrastructure development following key policy reforms, and a well-managed financial system.
In addition, robust growth has been accompanied by the continued health of its external payments position, supported by increasingly large flows of foreign direct investment, while inflationary expectations are becoming better anchored at a more stable and historically lower level.
Prudent fiscal management has contained budget deficits at very low levels and has reduced the government's debt burden as a share of GDP.
Infrastructure spending, cost advantages and education
The domestic sector is nearly 60% of Indonesian GDP, which reduces vulnerability to external problems, and some drivers like infrastructure investment should keep fueling growth over the middle term regardless of the international climate. Transportation infrastructure hasn´t grown fast enough to provide the needs of the expanding Indonesian economy, and that may create some bottlenecks.
But at the same time it guarantees that infrastructure investment will be available to sustain growth if global conditions turn for the worse. Indonesia spends around 3% of GDP on infrastructure, while that ratio for China is around 9%. Considering that the country is in a sound fiscal position it has the possibility to increase infrastructure spending when it needs to revitalize growth rates.
The Indonesian population is still relatively poor, per capita income is less than 10% of the levels observed in the United States, even when adjusted for internal price differences. On one side this is a serious challenge for any government trying to implement a sustainable long term development strategy, but it also makes it easier to achieve higher levels of economic growth for long periods of time, since wages are very competitive on an international basis.
The Indonesian government has also implemented the “20% Rule” which is a constitutional mandate stating that 20% of total state expenditure should be directed towards the education sector, this target was first met in 2009 and we can see in the chart from the World Bank that in meant a huge increase in education spending be it measured in absolute terms or as a percentage of GDP.
Investing in education is one of the best long term policies a country can have when targeting productivity increases and long term competitiveness. Low wages won´t last forever, and Indonesian authorities seem to be aware of that fact and willing to invest in a more sustainable future for their country.
Things are not perfect in Indonesia, of course, the political climate is quite unstable, corruption seems to be an endemic problem and there are racial and religious differences which have produced terrorist conflicts in the past. Things seem to be getting better on the institutional front, but there is still a lot of work to be done.
Investors with a long term investment horizon and who are not afraid of tolerating some volatility could find and interesting possibility in Indonesian stocks. The most popular vehicle to invest in Indonesia is Market Vectors Indonesia (NYSEMKT: IDX), which has more than 535 million USD in assets under management. Stocks in this ETF are trading at an average P/E ratio of 13 and the instrument pays a 1.5% dividend yield.
Indosat (NYSE: IIT) and Telekomunikasi (NYSE: TLK) are the two main telecom operators in the country and they provide some interesting exposure to the emerging middle class. Telekomunikasi looks more convenient, paying a 6.7% dividend yield and trading at a P/E ratio of 13.6. Indosat on the other hand yields a modest 1% and is trading at a P/E ratio above 30.
Telekomunicasi is the market leader and also a more attractively valued stock, but investors should pay attention to the fact that telecom sector in Indonesia is being deregulated and that could affect market dynamics in the following years.
Investing in emerging markets implies some extra risks and additional volatility for investors, but the long term fundamentals in countries like Indonesia look much better than in many developed nations. As long as the institutional situation keeps getting better, like is currently the case, long term investors should realize superior returns by investing in this country.
Motley Fool newsletter services recommend Telekomunikasi Indonesia (ADR). The Motley Fool owns shares of Telekomunikasi Indonesia (ADR). acardenal has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.