Tuesday, March 18, 2014

Indonesia Notes - Politics, Economy and the Jakarta Jazz Festival

A handful of conversations in Jakarta left me feeling better about Indonesia and its prospects than when I arrived.  Indonesia was the first market I covered as an equity analyst and I've written several books/reports on its companies, business groups and SOEs.  One never forgets his first love.

It is very uplifting to see the progress the country has made from when I initially went there in July 1989. From the depths of the Asian financial crisis and subsequent political chaos there has been tremendous progress in the last 25 years.  

I haven't been positive on Indonesian equities for about a year.  Last Spring, high valuations and not knowing who will be leading the country in some 18 months left me with the feeling that there could be better returns elsewhere. It was a lucky call with Indonesia's main index falling 20% in the next five months before recovering to about the same level as it was a year ago.  The Rupiah has not fared as well. It fell by almost 20% vis-à-vis the US dollar between March 2013 and January 2014 before rebounding for a YoY decline of about 16%.  Renminbi-based investors would have fared a bit better with the Rubiah sliding by some 15% YoY.  Euro-based inventors would be down some 19% YoY. 

Headline valuations are still high in my opinion with more than half of the stocks in the iShares Indonesian ETF trading at PE ratios above 15x.  Like many markets Indonesia appears like a two-tiered one.  Large ETF/Index stocks are typically at much higher valuations than non-ETF/index mid-and-small caps. It seems that one can almost always find value in Asian small and mid caps if one is willing and able to do the leg work.  Several of the Asia-based small, mid-cap managers I follow had very good returns in 2013 with most beating their respective indexes.


2014 is an election year in Indonesia. Legislative elections are slated for 9 April and presidential elections for 9 July (and September if a presidential run-off is needed). It’s worth noting here that by population Indonesia is the world’s third largest democracy after India and United States.

Indonesian democracy seems to have taken root.  Everybody I talked to is expecting the upcoming presidential primary and election to proceed smoothly.  This is great news for everybody in my opinion.  I’ve written before that I think of democracy as a process and Indonesia by all evidence and feedback seems to be sticking to the process (see blog post here).

Several emerging countries are having difficulties with political transitions (Egypt, Thailand, Ukraine), but at this point Indonesia's democratic process seems intact and healthy.   This is a major positive for investors. 

I came away with the impression that front-runner Jokowi (Joko Widodo) is not the shoo-in that the foreign press and brokers make him out to be.  Amongst my contacts who can vote, several expressed reservations about him, the largest being that he doesn't have enough experience, having only been mayor of Jakarta for a short time.  His only other notable political position was as mayor of a mid-sized city in Central Java (Solo).  I was also told that he is having difficulty making substantial changes in Jakarta, as the entrenched bureaucracy is pushing-back on his reforms.   

Another candidate with a more colorful background is Rhoma Irama, who's known as the King of Dangdut, a popular Indonesian music genre.  He’s used the race and religious card against Jokowi’s right hand man and running mate, who is Christian and ethnically Chinese.  Rhoma is not the front-runner, but star-power can be captivating to voters. The Philippines elected local ex-movie star Joseph "Erap" Estrada in 1998, and the Americans elected ex-actor Ronald Reagan in 1981.  And don't forget Arnold Schwarzenegger who recently served as governor of America's most productive state. 


My contacts are reasonably upbeat about the Indonesian economy and its currency.  Consumer demand has held up better than expected despite weak commodity prices.  If attendance at the annual Jakarta Jazz Festival is anything to go by, the economy certainly seems to be doing well as many performances were packed. 

10-months into his job as central bank governor, Agus Martowardojo seems to be popular amongst the very small sampling of financial professionals I talked to.  He is seen as a strong inflation fighter having increased Indonesia’s interest rates by 1.75ppt to 7.5% since taking over.

Official inflation likely understates the true picture.  Locals - admittedly expats and upper/middle-class Jakarta residents - reckon the true inflation rate is much higher as the costs of consumer products and big-ticket items such as school fees have increased much more than headline inflation. This more-or-less in-line with my observations in Hong Kong (see blog post here).

People I asked thought that the rule to ban raw ore exports would not derail the economy.  If a recent Jakarta Post front-page article is anything to go by, it may help to induce Russian investors – who have been promising to invest in Indonesia for several years – to finally pull the trigger (article here). 

From initial research into Russia and conversations in Kiev, it seems that Russian oligarchs and businessmen are investing outside of Russia as a way to protect their assets from the greedy power structure at home. I was told that Russians prefer to take over assets rather than buy or build them. 

Trip Notes

One thing that has notably increased over the years is Jakarta's traffic.   I likely spent more time parked in traffic jams than meeting with friends and ex-colleagues on this trip. Jakarta's road system is still very third world outside many of its newer areas, and traffic can be horrendous.  The city's public transportation system remains abysmal and is not really an option for most visitors.

This was in sharp contrast to my 10-days in Kiev where I was the week before.  Kiev and its surrounding areas seem to have a decent traffic and highway system. Granted I was there in a non-typical week when the Maidan shootings occurred so my outlook may not reflect the typical situation.  And locals complained about traffic jams and the taxi situation is not nearly as convenient as Jakarta.  But nowhere was traffic as chaotic as in Jakarta.

However I spent very little time in traffic as compared to Jakarta and there is halfway decent public transportation.  Its subway is old, but it is frequent, runs well enough and is easy to navigate for a non-Russian/non-Ukrainian speaker.

Hopefully this will be fixed somewhat when Indonesia's eminent domain law comes into effect later this year - three years after it was passed and just in time for a new president to deal with.  Passing the buck. 

Jak Jazz

This year's Jakarta Jazz Festival was good.  There were some 170 performances over three days so there was a lot going on.  Compared to last year, this year's was more geared to pop bands.  But with over 170 performances over three days there seemed to be something for everyone.

Some of the most memorable performances I caught were on the Brazilian stage.  Tania Maria gave a wonderful and spiritual performance as did the more mellow Ivan Lins.  Both are amongst the most accomplished Brazilian musicians at it was great that they made the trip to Asia – especially considering that it was so close to Carnival.

Compared to last year the festival's organisation seems to have deteriorated.  Several performance times did not correspond to the printed schedule. Also one of the people I really wanted to see  - Hammond B3 organist Lonnie Liston Smith - was not there and no notice or explanation of the cancellation was given.  This was a major disappointment. 

A key gripe about the festival’s staging is that venues are close together and one can hear the performance next door.  This was particularly the case in quieter performances.  Ivan Lins complained about this during his Friday night performance when, during a quite tune, we could clearly hear the booming bass and drums form the nearby sound check.

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