Investors warm to RI, but bulls still out

Investors warm to RI, but bulls still out

Jill Wong, Reuters, Hong Kong

Roaring stocks, a sell-out return to the bond market, successful asset sales, an upgrade to its credit rating outlook, a new deal with creditors and fresh loans from the IMF -- Indonesia is on the comeback trail.

But while investors might be warming to Indonesia, it has a very long way to go before the real bulls return.

"The (Indonesian) market has been the best performing, but the number of stocks and the liquidity is very, very limited. We are not greatly enthused to participate in that market," Stewart Aldcroft, managing director of Investec Asset Management, said.

Advocates say Indonesia has some very compelling numbers.

Shares on the key Jakarta Stock Exchange are up 34 percent this year, outperforming everywhere except Pakistan, while valuations are still among the cheapest in Asia.

Indonesian firms have sold US$375 million worth of dollar bonds in three separate deals in four months, interest rates are coming down, growth is picking up, the rupiah currency is the best performing in the region, and pressure is easing after Indonesia rescheduled $5.4 billion worth of debt.

The hard-to-please IMF has approved US$347 million of loans and waived several conditions of a US$4.6 billion loan program to give Indonesia more time to carry out reforms.

There's even the potential of a ratings upgrade after Moody's raised the outlook on its B3 sovereign rating to positive.

But skeptics, many of whom still nurse the pain caused by the country's collapse under a US$140 billion debt mountain in 1998, are scratching behind the gloss.

"I won't be jumping in just because Moody's upgraded the outlook," said Ben Yuen, Hong Kong-based bond fund manager at CMG First State Investments, despite recently adding Indonesian risk to his portfolio.

Outperformance of the JKSE over the Morgan Stanley Capital International (MSCI) Far East Free ex-Japan index in dollar terms owes as much to an appreciating rupiah as it does to a vast improvement in earnings.

Indonesia's tiny weighting of just 1.46 percent, the index's smallest component, also keeps funds at bay with a lack of liquidity and small market capitalization restricting foreign fund managers to just two or three major stocks.

And cheap valuations are more a function of massive underperformance in a market that saw the value of its currency plunge some 80 percent against the dollar during the crisis and is still at least 60 percent off its pre-crisis level.

Indonesian-themed mutual funds were second only to Korean funds in March, delivering 10.26 percent on average for the 10 funds tracked by Lipper Asia, a Reuters company.

Those same funds have lost 29.7 percent on average during the past five years.

Fund managers want to see actual upgrades to ratings, now below those of regional peers, before raising their exposure.

"I've got very little interest in the market," said James Blair, Singapore-based director of Asian fixed income at Aberdeen Asset Management. "Indonesia is a tiny percentage of our assets."

Political instability -- Indonesia's fledgling democracy is under its fourth president in as many years -- and frequent religious clashes in the world's most populous Muslim country don't help.

Neither do vested political interests, which drag on reform.

The sale of the country's largest bank, Bank Central Asia (BCA), to a U.S. investor is hailed by some as a turning point, others are not impressed by a deal that took almost two years to complete instead of an originally scheduled nine months.

While the year-old government of President Megawati Sukarnoputri is more stable than its two predecessors, political risks are still the key to unlocking Indonesia's potential.

Without political will, the asset sale program managed by the Indonesian bank restructuring agency (IBRA) may flounder.

"The restructuring hasn't really progressed, that's why the sale of BCA recently was so closely watched. They are talking about selling Bank Mandiri, Bank Niaga, Bank Danamon in the future so let's wait and see whether that comes through," LiLian Ong, regional economist at Macquarie Bank, said.

IBRA, set up during the Asian financial crisis in 1998, controls assets taken over from troubled debtors with a nominal value of some 600 trillion rupiah (US$64.5 billion) although the market value of its portfolio has plummeted.

It must raise 35.3 trillion rupiah in cash from sales this year from 27 trillion rupiah budgeted last year. It managed to confound critics when it exceeded last year's target to raise 28 trillion rupiah.

That kind of surprise to the upside has equity strategists like ING Barings' Markus Rosgen banking on outperformance in Indonesia and giving it an increasingly fashionable overweight.

He reckons the JKSE will yield a further 11 percent gain for investors, taking the market to 600 by the end of the year -- a level last seen in February 2000 -- augmented by a strengthening of the rupiah to 9,000 to the U.S. dollar from around 9,300.