1. Indonesia’s key strength lies in its large and growing domestic market
Indonesia needs no introduction. It is Southeast Asia’s largest economy, the fourth most populous country in the world, and one with a young and growing demographic. Therefore, it is no surprise that Indonesia is often associated with large growth potential, having a forecasted GDP CAGR of 8% from 2022 to 2027.
In recent years, we see the government doubling down on efforts to realize Indonesia’s potential. Significant government reforms like the Omnibus law were implemented to improve ease of doing business. In fact, Indonesia improved from being ranked 91st in 2017 to 73rd in 2020 on the World Bank’s Ease of Doing Business Study. Right after the results in 2020, President Jokowi ordered his cabinet to improve rankings and make it to the top 40.
In this article, we explore some key thematic ideas to act as filters to select several picks to conduct deeper analysis on.
2. The government’s overarching economic plans
To uncover the true gems in the Indonesian market, we need to first understand the government’s priorities and plans for the economy.
There is a bunch of national development plans announced by the government, including the National Long-Term Development Plan (2005-2025), the National Medium-Term Development Plan (2020-2024), Digital Roadmap Indonesia (2021-2024), list of 37 KPPIP priority projects, etc. Having said that, the economic angle to all of these can really be summed up in the diagram below, taken from Bank Indonesia [Source].
Out of the 5 points above, President Jokowi revealed 3 of them (downstreaming, digitalization, green economy) to be major economic strategies when he was speaking at the opening of the Workshop for 100 Indonesian Economists at the State Palace back in August 2021.
3. Theme #1: Industrial Downstreaming
3.1. Industrial Downstreaming
What is downstreaming: Indonesia is a country blessed with rich natural resources. Yet, the country is not capturing its full economic potential because people simply export the unrefined raw materials out of Indonesia without any further value-added activities (e.g., refining). As such, the government is looking to enhance export value-add by banning export of unrefined raw materials like nickel ore (Jan-20).
Commodities are the backbone of Indonesia’s economy: Macroeconomic stability remained intact last year, with a current account surplus partly because of an export boom on the back of rising commodities prices due to the Russia-Ukraine war.
Case Study of nickel: The export of nickel ore was first outlawed as early as January 2014, and while some ore with concentration below 1.7% could legally be exported between January 2017 and December 2019, any export of nickel ore has been banned as of January 2020 [Source]. This was a huge success for the Indonesia economy. Indonesia saw a significant increase in smelting capacity that resulted in nickel-related exports ballooning 10-fold to US$20b in 2022.
Beyond nickel: The government hopes to replicate its success in Nickel processing after banning the export of raw nickel material with Bauxite (announced in Dec-22 a ban from Jun-23), Tin (announced in Oct-22, timing undecided) and Copper (announced plans in Jan-23, timing undecided) going forward. Indonesia has also set eight priority sectors for its downstreaming strategy: mineral, coal, oil, gas, agriculture, maritime, fishery, and forestry, as well as 12 of its derivatives [Source].
3.2. Investment Ideas
Below are just some examples (non-exhaustive) based on a very quick scan of the IDX. In-depth analysis on each of these companies on how they are reacting to the downstreaming policies should be done before committing to a buy.
Direct beneficiaries
Those who currently mine the raw commodities may have an opportunity to develop downstream capabilities and hence, make more money. Those who are already in the downstream business may see higher demand.
- Nickel/Bauxite/tin/etc.: Mining companies like PT Vale Indonesia, PT Aneka Tambang and PT Timah would in a better position to compete in the downstream processing segment, since foreign competitors will be closed off.
- Agri-commodities: Companies like Indofood, which is one of Indonesia’s largest food processing companies, may stand to benefit from the government’s focus on increasing domestic processing and adding value to Indonesia’s agricultural products
- Steel: Krakatau steel is Indonesia’s largest steel producer and stand to benefit from the increased demand for domestically produced steel, especially in construction and manufacturing. They have also expressed interest to develop high-value steel products like automotive steel and high-strength steel.
Indirect beneficiaries
With the development of downstream capabilities, many other services may be required.
- Infrastructure: Construction companies like PT PP Tbk may stand to benefit from more infrastructure projects that arise as companies across Indonesia develop their downstream industry capabilities
- Logistics: As Indonesia’s domestic refinery capacity increase, logistics and supply chain players like AKR Corporindo, PT Blue Bird, PT JNE Express, etc. may stand to benefit from the natural rise in demand for transportation and storage services of the commodities
- Financial institutions: The Association of State-Owned Banks have already said that the banking sector would commit to the request with downstream industries in Indonesia [Source]. Beyond banks, insurance companies may also benefit. Some examples are Bank Mandiri, Bank Central Asia, etc.
4. Theme #2: Green transition
4.1. Electric Vehicles (EV)
Underpinned by its substantial nickel reserves (an important raw material for batteries), Indonesia aims to be the EV hub of Southeast Asia. Recently, Indonesia also unveiled EV subsidies to boost EV sales in Indonesia, so that global EV makers will invest manufacturing plants in the country (since only EVs manufactured in Indonesia using at least 40% local content will be eligible for the subsidies) [Source]. Note that there were already some reports of Indonesia finalizing agreements with BYD and Tesla even before the subsidies were confirmed [Source].
Such actions further cement the Indonesian government’s strong commitment to develop the EV space, especially amidst competition with regional countries like Thailand, which is also keen to become Southeast Asia’ EV manufacturing hub.
4.2. Green energy transition
Indonesia President Joko Widodo and leaders of US, Japan, Canada and 6 European countries pledged to raise at least $20b under the newly launched Just Energy Transition Partnership (JETP) that was announced during the G20 summit in Bali last year. This is a game changer and will help accelerate the energy transition from coal to green energy.
4.3. Investment Ideas
EV manufacturers setting up plants in Indonesia would result in a sizeable increase in demand for refined nickel. Nickel names would therefore benefit.
It might also be worth looking into companies in the sustainability space that may benefit from the transition. For example, (1) PT Pertamina, which is investing in geothermal/biofuels and has set a target to have 30% of its energy mix to come from renewable sources by 2030, (2) PT Pupuk Indonesia, which is involved in producing sustainable fertilizers for the country and (3) PT Indofood Sukses Makmur, which is involved in sustainable agriculture projects.
5. Theme #3: Booming digital economy
5.1. Digitalization
Immense growth potential: The above are forecasts published by Google’s annual SEA e-Conomy study. Given Indonesia’s sheer domestic market (and that digital penetration is still relatively low), it should come as no surprise that Indonesia’s digital economy is forecasted to grow rapidly at 19% CAGR from 2022 to 2025.
Backed by government support: As mentioned, the government is a huge proponent of digitalization. Their key initiatives are highlighted below in 4 pillars spanning across infrastructure, government, economy, and society.
5.2. Investment Ideas
Again, below are just some prominent names to start off your deep dive with. Understanding the unique positioning of each company and how they are leveraging Indonesia’s digital economy growth is important before committing to a buy.
Digital Infrastructure Players:
- Regional data centre players: with larger exposure in Indonesia – such as China Telecom, Equinix and NTT
- Local data centre players: (note that DCs tend to be a secondary business) – such as Indointernet, Envy Technologies, Multipolar Technology, Mora Telematika Indonesia, etc.
- Telecommunication tower players: Enabling digitalization via repeater tower stations – such as Tower Bersama, Telkomsel, Mitratel, etc.
Digital Economy Players:
- Tend to be concentrated in the e-commerce space. Tend to be unprofitable, but a year focusing on efficiency and cost cutting may change things.
- Local home-grown players: Go-To, Bukalapak, Traveloka (not listed yet, but had a potential de-SPAC opportunity with Bridgetown Holdings in 2021), Bank Jago, Emtek, etc.
- Regional players with notable Indonesian presence: Grab, Sea Limited, etc.
- Special Mention – Mitra Bukalapak: Helps digitalize business models of the traditional mom and pop stores across Indonesia – a huge market. After all, a big focus of President Jokowi’s digital economy plan hinges on digitalizing the 60m MSMEs across Indonesia. Note that a BCG study indicated that currently, only c.20% of MSMEs show signs of true digital literacy [Source].
6. Key risks to be aware of
6.1. Foreign Exchange Risks
As seen above, compared to peer nations, Indonesia’s foreign reserves really isn’t very large, especially given its size. Furthermore, as of Sep-22, foreign reserves have declined from US$146b in 2021 to US$131b. This mean that Bank Indonesia (central bank) might not have much room to intervene and stabilize the Rupiah especially during a time of market volatility.
In addition, compared to Singapore and the US, Indonesia has much higher inflation (comes together with higher growth), and hence contributing to a weakening Rupiah vs USD/SGD. Furthermore, the Rupiah has a track record of depreciating against the USD and SGD as seen in the second column.
Furthermore, in the short-term, Bank Indonesia seems to be holding interest rates. With central banks across the world still hiking, the Rupiah may continue to depreciate against other currencies.
6.2. Corporate Governance Issues
Indonesia’s market has traditionally been dominated by conglomerates, which are typically family owned. Family-owned businesses tend to face corporate governance issues especially since the majority shareholders and people in control (i.e., family) may have a conflicting interest vis-à-vis minority shareholders (i.e., retail investors like us).
Additionally, there is an overlap between politics and business in Indonesia. Many prominent cabinet ministers have business ties, and a conflict of interest may arise.
Just to name a few: Minister of Education Nadiem Anwar was the co-founder and former CEO of Go-Jek, Coordinating Minister of Maritime Affairs and Investments Luhut Binsar Pandjatan was the founder of PT Toba Sejahtra and Minister of Tourism and Creative Economy is the co-founder of PT Saratoga Investama Sedaya Tbk.
7. Concluding Thoughts and accessing the Indonesia Stock Exchange
Accessing the Indonesian market can be tough since it is less developed and liquid. I have looked through all of the popular local Singapore brokers and it seems like only Phillip Securities’ Poems Cash Plus Account enable access to the IDX [Source]. However, commissions are pretty steep at 0.18% of transaction value with a minimum of IDR 250k (i.e. c.S$22).
Our approach is to identify broad themes before deep diving into specific stocks and making very selective picks on a few winners. We are currently looking at a couple of nickel and tech players and may publish an article if there are interest.
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