At a forum in Singapore on 31 March, 2010, Mr Gita Wirjawan, Chairman of the National Investment Coordinating Board in Indonesia, said that foreigners may be allowed to own apartments and even commercial property in Indonesia. No details are provided yet but this development will be under a revised rule expected by Q3 of 2010. The revised regulation aims to relax the rules on foreign ownership of property in Indonesia, making it easier and more attractive for foreigners to invest in Indonesia. This move comes at a time when improving government debt ratio and growing foreign currency reserves has earned Indonesia an upgrade in its sovereign credit rating to BB from BB- by S&P in March 2010. The S&P rating also comes with a positive outlook, suggesting a bias toward further upgrade in the next six to 18 months. This follows Fitch's upgrade in January 2010 and Moody's upgrade in September 2009. After this upgrade, Indonesia remains two notches below S&P's investment grade credit rating and Finance Minster Sri Mulyani was quoted in the media expressing optimism that Indonesia could achieve an investment grade rating within a year.
The equity market and the IDR have both held up well during the investigation of the legitimacy of the Bank Century bailout since the start of the year, suggesting that investors are investing in Indonesia for its long-term strategic appeal. Although further investigation is still ongoing, the Bank Century case was politically motivated and at the end, it bodes down to political negotiation between President Susilo Bambang Yudhoyono's (SBY) Democrat Party and other political parties. Out of the seven-party ruling coalition, three parties supported the Democrat Party in the bailout decision, while others including Golkar, PKS, PPP, PKB were opponents of the bailout. This has thus given rise to the potential for the President to re-evaluate the ruling coalition, which could possibly involve cabinet reshuffling against disloyal political parties. The opposition has called for the removal of Sri Mulyani as the Finance Minster, but with the President openly backing both Sri Mulyani and Boediono, we see the possibility of Sri Mulyani losing her position as low. We maintain our view that President SBY has sufficient support to withstand the political quandary. However, the Bank Century investigation has been a huge distraction to the reform process in the past few months and we believe this could cause delay to the much needed infrastructure reform programs.
Nevertheless, Indonesia remains a compelling long-term structural story. The underleveraged nature of the economy with debt-to-GDP at 25% suggests that there is significant scope for the economy to leverage up. Furthermore, Indonesian banks' balance sheets are robust with a low average loan-to-deposits ratio of 55%. Against the backdrop of high consumer confidence in Indonesia, banks are also increasingly willing to lend and this should drive economic growth. On the earnings front, 2010E consensus EPS revisions in Indonesia remain strong in March printing at 1.5%, led by consumer cyclicals (+6.7%) and energy (+3.3%) sectors. Indonesia is currently trading at P/E 2010E of 14.7x with 15.5% EPS growth and we believe the valuation is fair although not undervalued from a historical perspective. Hence we maintain a Neutral call on the market and our 12M DDM-derived JCI target of 2,900. Our top picks are United Tractors (UNTR IJ, BUY) and Indofood Sukses (INDF IJ, BUY), which we believe give investors exposure to the favorable long-term growth potential of Indonesia.
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