Indonesia Rocks

By Callum Turcan - August 27, 2012 | Tickers: CAT, GM, IDX, TLK, TM | 0 Comments

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Growth in the mix!

Indonesia,

located right above Australia and just under mainland Asia. Over the past several years, Indonesia has experienced an economic boom (its latest GDP growth rate was 6.4%, above expectations) that seems to have largely gone unnoticed. Indonesia's economy is being helped by large investments in their infrastructure, and this year they got their debt rating raised to investment grade.

Everyone talks about China (7.6%) or Brazil (2.3%) or Russia (4.9%) or India (5.3%), but as you can see, Indonesia is growing faster than three out of those four economies. Then why is everyone talking about the BRIC nations? Why isn't it BRICI or BRIIC or IBRIC or something of that nature? Right now Indonesia's GDP is $846.832 billion, so that 6.4% growth rate is quite meaningful. The OECD expects that 2013 would be 6%, and they also said that 2012 GDP growth would be 5.8%, but Indonesia is already outpacing that. Even a 6% growth rate is very good, especially when you factor in the terrible macro-economic trends and data coming out right now.

How to play it 

So how to you benefit from this nice growth. Well, there is the easy, straightforward way to do so with Market Vectors Indonesia Index (NYSEMKT: IDX). This is an ETF that invests in Indonesian companies to reflect the performance of the Market Vectors Indonesia Index, with an expense ratio of 0.61%, .02% less than the industry average. It has a nice 1.60% dividend yield, and is largely invested in large cap stocks so you don't have to worry about your investment tanking. The Motley Fool Cap's Community gives this four out of five stars. If you are among one of those who don't like ETF's and want more of a direct play, there is PT Telekomunikasi Indonesia (ADR) (NYSE: TLK), which is a $19 billion telecommunications company which is partially state owned (kind of turns me off of it) and pays out a 3.35% dividend yield with a PE of 16. The Motley Fool Cap's Community gives it five out of five stars, and Wall Street gives it a buy with four out of four analysts bullish on this stock. TLK offers phone, mobile phone, and internet services across the country.  

Cars need roads

Another way to play their economic boom and increased investment in their roads is to buy Toyota Motor Corp (NYSE: TM), which is currently planning on increasing its capacity in Indonesia from the current 110,000 units a year to 220,000 units by 2014. Earlier in the year, Toyota was just planning on building a new plant that could build an extra 70,000 cars a year, but they have since decided to increase that number by 50,000. As of right now, they have one plant that has an output rate of 110,000 cars a year in Karawang. As Indonesia builds out its infrastructure and sees its middle class grow, more people will need cars. General Motors Corp (NYSE: GM) is also betting big on Indonesia, with a $150 million investment to build a factory that will produce 40,000 units a year. One reason why Indonesia is having such strong growth is because of a sharp rise in direct foreign investment, such as those two examples above. The auto market in Indonesia is expected to grow to almost 1 million vehicles a year by the end of 2012, with Indonesian Automobile Industry Association vice chairman Johnny Darmawan saying he expects to see auto sales come in at 960,000 by year's end. In the first quarter, Indonesia's auto sales were up 10.6% (year over year) and 249,589 vehicles were sold. In 2011, 870,000 vehicles were sold.

The Roads!

Indonesia has been heavily investing in its infrastructure, with a planned $250 billion to be spent on infrastructure over the next five years, which includes its roads and highways systems. For example, "the operator of the Tangerang-Merak Toll Road, Marga Mandala Sakti (Marga Mandala), will be allocating $17.12 million (in US dollars) to increase the toll road’s capacity. It will be adding an additional lane between Cikupa and West Balaraja. The additional 8km stretch will contribute to a revenue growth of 10 to 15% starting from 2014, said Wiwiek D Santoso, the managing director of Marga Mandala." Morgan Stanley's Deyi Tan says investment in infrastructure will be 5.9% of GDP in 2015, up from 3.9% in 2009. This will boost GDP growth to 7.2% by 2015, according to Deyi. Indonesia plans on building 20,000 km of roads and adding an extra 15,000 megawatts of power generation by 2014. Caterpillar Inc (NYSE: CAT) is another great way to play this growth, as they are investing heavily in the area to take advantage of all the infrastructure projects. They are currently building a $150 million plant in Batam.  

Can it be done?

In 2010, Indonesia's debt to GDP ratio was 25.7%. By 2011, that was down to a ratio of 24.5%. Indonesia has very low levels of debt, especially compared to the United States (108%), Germany (81.2%), Japan (225%), and Greece (159%). So it seems that Indonesia will be able to maintain its high levels of infrastructure spending going forward.

Jobs mean growth

This graph right here sums it up. Because of all the reforms Indonesia has gone through, it was able to easily pull itself out of the late 1990's Asian financial crisis. Not only do they now have democracy, but they also have low unemployment rates. Over the past eight years, Indonesia's unemployment rate has fallen from a high of 11.24% down to a nice and low 6.32%. If you look at the trend over the past years, it looks like Indonesia's unemployment rate will continue to go down to below 5%, and this will enable them to maintain high levels of GDP growth. Plus, the demographics are in Indonesia's favor, with half of its 220 million population under 30. This is a very bullish sign, and as Indonesia gets older, its consumer spending will skyrocket as more people enter the workforce and they reach their peak earning period later in their life.

Final Thoughts

Indonesia has a vibrant economy that is poised to grow at a fast (+6%) rate over the next several years/decades. If they keep investing in their infrastructure, keep being free-market minded, and keep attracting foreign investment, then this economy offers a lot of great investing opportunities. You can play this in a number of ways, through multinationals expanding into Indonesia, ETF's that invest in Indonesian securities, or in Indonesian companies listed on American stock exchanges. I'm very bullish on Indonesia going forward, and think this country should be considered a part of the BRIC economies.  

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