Bali played host to the Second Indonesian Investment Forum last week, which brought together 700 foreign and local investors, and executives from international finance agencies to look at investment opportunities in Indonesia. To learn how foreign investors view the country, The Jakarta Post's Rita A. Widiadana spoke with Sheldon Trainor, head of Asia Investment Banking for Merrill Lynch. The following are excerpts of the interview.
Question: How does Merrill Lynch now see the outlook for new investments in Indonesia?
Answer: Both the macro and microeconomic environment in Indonesia look very positive and investors are excited about the current administration's strong leadership in steering the economy. Investors are also impressed by the increased transparency and maturity evolving among the corporate sector in Indonesia.
The strong growth in both the resource sector and in the domestic economy is creating a genuine need for more capital. These themes are translating into real and sustainable economic growth. The recent increase in foreign direct investment has led to the Indonesian corporate sector expanding capacity, resulting in stronger cash flows and higher corporate profitability.
How do you see these changes?
Unlike the last economic upturn in the early to mid-1990s, growth is primarily being driven by internally generated capital as a result of rising profitability, higher natural resource prices and increased consumer spending. In short, these economic themes are translating into real and sustainable growth.
The success of capital market transactions over the past 12 months from both the government and private sector paves the way for future issuances of debt instruments from the country. They have been well structured and well executed, and this will create real demand from both international debt and equity investors for more Indonesian deals.
The transactions have been well received by international investors. This is now a market that large blue-chip investors are focused on. We (Merrill Lynch) expect this to result in increased size of transactions, lower costs of capital and, where relevant, longer terms.
Incremental foreign investment into the country has reemerged following a sustained period of zero outside direct investment. Last year saw the highest level of foreign direct investment in the country in the last five years. The government's liberalization of the banking sector, opening it up to foreign participation, has proved a genuine success story.
When do you think foreign direct investors will begin to enter the country and start their projects in Indonesia?
I think investments in palm oil plantations, coal mines, oil and gas exploration will likely start to flow. Meanwhile, investment in basic infrastructure will be much longer. Investment in infrastructure facilities that are associated with various natural resources projects will soon happen, such as the development of roads, ports to be built in support of various natural resources projects,.
Which areas do you think are the most attractive to foreign investors now and why?
The majority of foreign investors are mostly interested in natural resources projects and import substitutions. Given the current situation, in which problems have appeared in a number of natural resource-based companies, I think they were only motivated by certain factors on the ground, but overall sentiment in investment projects here in Indonesia has been quite positive. Most (natural resource) projects operated in Indonesia are very low cost with high-quality assets. Besides, operations have been running for a very long time, so it is very predictable.
But there is a good example of an Indonesian company, Bumi Resources, which took over the operation of an international company. They (the management of Bumi Resources) were doing a very good job in this case. This trend will likely continue -- Indonesian companies operating more projects especially in natural resource sectors.
In addition to natural resources project, investors will be eager to look into import substitutions for particular products such as petrochemicals.
How do you see the prospects for foreign investment in basic infrastructure, which the government has been aggressively promoting?
Domestic infrastructure projects like the development of toll road projects and power stations will take a longer time. In this particular sector, investors are still facing uncertainties about the regulatory frameworks.
Therefore, investing in such projects is still considered too risky. We understand that the Indonesian government has been working hard to improve several policy frameworks, incentives and facilities to boost investment in this sector. I think the more they (the government) can provide good and clear frameworks, the more they can attract investors.
How do you see the new package of reforms the government launched in early March? Will these reforms be able to improve investor confidence in Indonesia?
While the reform process appears to be moving in the right direction and we are a supporter of these changes, we do not underestimate the challenges ahead in further reforming the economic and political infrastructure.
Corruption and corporate governance issues remain a concern for international investors. Corruption in itself is a heavy burden on the economy and it is in Indonesia's best interests that measures are taken to resolve it. We understand that this will be a long road to travel.
Investors would like to see how these reforms will be implemented within the period of 12 months.
As an investment banker and an opinion shaper for investors interested in Indonesia, how do you see the business risks in Indonesia, especially with regional autonomy?
I think we are very comfortable with the business risks in Indonesia, in particular in the natural resource and import substitutions sectors. India and China are now playing very significant roles in Asia. Indonesia, with the current economic and political environment, will follow suit. Indonesia will likely play a very big role both as supplier and consumer. This kind of situation will bring comfort to potential investors.
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