Indonesian markets up, but have long way to go

Indonesian markets up, but have long way to go

Sabyasachi Mitra, Reuters, Hong Kong

Investment bankers and fund managers are trickling back to
Jakarta, three or four years since many last bothered to visit,
drawn by a combination of rock bottom valuations, soaring returns
and a demand for yield.

Many remain to be convinced that a jump in asset markets that
has turned Indonesia into one of the best performing investment
stories in Asia so far this year is sustainable and that the
political will to tackle graft and reform is strong enough.

But Thursday's high profile sale of the country's biggest
retail bank, Bank Central Asia (BCA), to a consortium of foreign
investors, could convince global fund managers to book their
flights for another look at long-ignored Indonesian assets.

"There's a valuation effect, base effect and also a re-pricing
of Indonesian risk. There is a turnaround in investor sentiment,"
John Woods, head of Asian credit research at HSBC, told Reuters.

"The activity of distressed and high yield players in
Indonesia seems to be accelerating," Woods said.

Indonesian dollar bonds are Asia's top performer returning
around nine percent so far this year, according to HSBC's Asian
Dollar Bond Index, and the rupiah has gained four percent, making
it the region's best performing currency.

The Jakarta Stock Exchange has soared nearly 20 percent in
local currency terms, the fourth best in Asia.

Investor expectations have built on asset sales of state-owned
firms, spurring hopes of future economic reforms, and a recent
government crackdown on corruption.

President Megawati Soekarnoputri's tough approach to wipe out
graft was reflected in the detention last week of Akbar Tandjung,
head of the nation's second largest Golkar political party, over
a US$4 million scandal.

Distressed and vulture funds -- like San Francisco-based
Farallon Capital Management which won the bidding for BCA -- are
already busy grabbing at chunks of broken domestic banks and
corporates, hoping to reap a windfall from restructuring.

Market sources say many regional financial institutions,
mainly Singapore and Hong Kong-based banks, are also parking
their short-term funds in Jakarta, lured by the yields on
Indonesian corporate junk bonds -- some of the highest available
in the region.

DebtTraders, a high yield bond broker, said bonds of Asia Pulp
and Paper (APP) group, one of the world's biggest distressed
borrowers with US$12.2 billion in debt, have risen in "total
denial of extremely poor financial results" reported this week.

DebtTraders quoted APP China Group bonds due 2010 trading at
24 cents, versus their face value of 100, up from about 16 cents
in early February and around seven cents in September 2001.

Similarly, the illiquid B3-rated Indonesian sovereign dollar
bonds due 2006 have snapped tighter by 138 basis points this week
to 303 basis points over Treasuries, massively outperforming the
market.

But traders say illiquidity and short supply forces over-
aggressive bids, while an abundant supply of synthetic credit
default products further distorts the real price of Indonesian
risk by offering a more liquid alternative that carries a smaller
degree of capital risk.

There are some investors, though, that say valuations of
fundamentally sound Indonesian firms are too tempting to resist.

"We are traditional long-only funds and we are going back to
Indonesia because there are signs of stability and you have
companies with very cheap valuations," Lena Tan, head of Asian
research at Fortis Investment Management, which oversees US$1
billion in Asia outside Japan.

Tan said Indonesia's vast domestic market, which drives the
country's economy, offered a diversity to fund managers looking
to offset the slack in global demand.

But few fund managers say they risk being left behind.

The tiny capitalization of Jakarta's stock market -- just
US$29 billion, the second smallest in Asia with a minuscule 1.2
percent weighting in the key MSCI Far East ex-Japan index --
means very little money moves it and very little money is needed
to catch up with it.

The cautious say it is too early to jump onto the Indonesian
bandwagon as Jakarta must still grapple with massive external
debt, inflation, corporate and financial restructuring, pockets
of separatist violence and political in-fighting.

"It has a long comeback period ahead of it. I still see lot of
latent political risks," Singapore-based Didier Devresse, chief
investment officer at ING Investment Management Asia, said.

"On a relative risk-reward basis, you have better places in
the region to put your money," Devresse said.