Indonesia Looks To The Future


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What a joyous day it must be in Jakarta now that the results of the hotly-contested Presidential election are final! Happily, the winner is Joko Widodo. Jokowi, as the Governor of Jakarta is known, won 53.15% of the vote, according to Indonesia’s election commission. His rival, Prabowo Subianto, who captured 46.85% of the vote, withdrew, citing “mass fraud.” Fortunately, Prabowo — a former Lieutenant General and former son-in-law of the long-time dictator Suharto — has decided not to follow through with his pledge to challenge the results.

Might Jokowi’s win be attributed to Indonesia’s populace seeing the potential of their vote in the recent election of Narendra Modi as President of India? After all, both men rose from modest backgrounds, were never members of the political elite and, importantly, rose to power on the promised reforms of economic benefit to all, not just the well-connected and privileged few.

There has been a great deal of optimism in the investment community in anticipation of Jokowi winning the election. This anticipation helped drive up the performance of the Indonesia Stock Exchange (IDX; formerly Jakarta Stock Exchange); the index for the Indonesia Stock Exchange is up more than 25% year-to-date. The results of the election were made available after the market closed; on fear of a Prabowo challenge, the index fell .75% before closing.

So just what can investors anticipate from a Jokowi presidency? Jokowi plans to cut government subsidies and raise fuel prices slowly over the next four to five years, saving the government $30 billion. He also plans to maintain the ban on mineral ore exports, which was imposed in January to force mining companies to process raw materials and build smelters in Indonesia. Infrastructure is very high on Jokowi’s “To Do” list, which was circulated during the campaign. He aims to build 3,000 km of rail track over five years, together with 3,000 km of national highways, and new seaports and airports.

Jokowi is also keen on moving Indonesia away from its high level of oil consumption, replacing it with gas, coal and geothermal. He plans to remove most diesel-fired power plants within three years, which will result in a savings of $7 billion in energy costs annually. The only aspect of his economic plan that could adversely impact foreign investors is the planned restriction on national bank sales to foreign investors. However, overall, Jokowi is far more market friendly than his opponent ever was or would be, and this creates ample opportunity for foreign investors once he’s been sworn in as President.

Indonesia is the fourth largest democracy in the world and is blessed with an abundance of natural resources. While these factors should have catapulted the country into an economic powerhouse, Indonesia has languished in the realm of the “almost there” as a result of rampant corruption and incompetence. The prospect of Indonesia finally claiming its place among the other Asian economic powerhouses has the investment community poised to act.

Indonesia is a major oil producer and exporter, yet it has to import the finished product due to lack of refining capacity. Over the years, plans have been drawn up by the Indonesian authorities to build new refineries. Major oil companies and countries, such as Japan, have shown a willingness to be involved, but nothing has happened. This is mainly due to Indonesia’s political and economic instability.

So, with Indonesia poised to perform under a new market-friendly president, I think greater exposure to the Indonesian markets is called for. Investors can gain this exposure via one of three ETFs focused on Indonesia: iShares MSCI Indonesia Investable Market Index Fund (EIDO), Market Vectors Indonesia Index ETF (IDX) or Market Vectors Indonesia Small-Cap ETF (IDXJ). They can also participate in Indonesia’s coming growth by investing in the many well-known multinational companies doing business there. One possibility is Caterpillar (CAT), which has been in Indonesia for decades and will surely play a large role in the country’s infrastructure development.

Other companies providing exposure to Indonesia’s growth prospects include L’Oreal (EPA: OR), one of the world’s top cosmetic firms, which opened its largest factory in Jababeka, West Java in 2012, and Coca-Cola (KO), which was first produced in Indonesia in 1932. Unilever (UL), Nestle (OTC: NSRGY), Kraft Foods (KRFT) and McDonalds (MCD) are all players in the Indonesian economy.

Local stocks poised to benefit from a Jokowi win include a number of companies listed on the Indonesia Stock Exchange, including Bank Central Asia (BBCA: IJ); Telekomunikasi Indonesia (TLKM: IJ); Visi Media Asia (VIVA: IJ), a media holding company; Tower Bersama Infrastructure (TBIG: IJ), a provider of telecommunication infrastructure services to Indonesian wireless carriers; and Astra International (ASII: IJ), which assembles and distributes automobiles, motorcycles and related spare parts. Consumer product companies, such as Gudang Garam (GGRM: IJ), which manufactures and distributes cigarettes, could also benefit from Jokowi’s election.

One final note based on what I see happening in developing Asia: the growing middle class has decided not to be apathetic any longer and, as such, is becoming increasingly involved in the political process. This only bodes well for other developing countries on that continent and, fingers crossed, those throughout the world.

Peter Kohli | 484.671.3011

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Investing Ideas , ETFs

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